Judge: Stephen I. Goorvitch, Case: 21STCP01655, Date: 2023-09-18 Tentative Ruling

Case Number: 21STCP01655    Hearing Date: September 18, 2023    Dept: 39

Insurance Commissioner v. Western General Insurance Company

Case No. 21STCP01655

Motion to Compel Arbitration

            Western General Insurance Company (“Western General”) entered into a reinsurance agreement with Fletcher Reinsurance Company (“Fletcher”), formerly known as Maiden Reinsurance Company, effective January 1, 2014.  Pursuant to their contract, Fletcher would assume 40% of the losses on reinsured policies in exchange for 40% of the policies paid by those policyholders.  On May 21, 2021, the Insurance Commissioner filed a verified petition for an order appointing it as conservator for Western General, because it was operating in “hazardous financial condition” within the meaning of Insurance Code section 1011, subdivision (d).  The Court granted the liquidation order on August 5, 2021. 

            The Insurance Commissioner maintains that Fletcher currently owes $1,196,475 as its share of losses under the reinsurance agreement.  Fletcher maintains that it is entitled to a setoff of $864,261 stemming from a commission in 2016, but it agreed to pay the remaining $332,214.  The parties’ dispute relates to whether Fletcher is entitled to this setoff and the forum in which this issue should be litigated.   

The parties attempted to resolve the dispute amongst themselves, and when they were unsuccessful, Fletcher filed a petition to compel arbitration in the U.S. District Court for the Central District of California.  The Insurance Commissioner moved for an Order to Show Cause why Fletcher should not be held in contempt, arguing that this petition violates this Court’s order in two respects.  First, the Insurance Commissioner argued that Fletcher violated Paragraph #26, which enjoins “all persons” from “instituting, prosecuting, or maintaining any action at law or suit in equity, including but not limited to . . . matters in arbitration against [Western General] . . . except upon order from this Court obtained after reasonable notice to the Commissioner as Liquidator.”  (See Liquidation Order, dated August 5, 2021, ¶ 26.)  Second, the Insurance Commissioner argued that Fletcher violated Paragraph #24, which enjoins “all persons” from “exercising any right of set-off” or “interfere[ing] in any manner during the pendency of this proceeding with the exclusive jurisdiction of this Court over Respondent.”  (Id., ¶ 24.)

The parties entered into a stipulation to resolve the dispute.  Fletcher agreed to dismiss the petition to compel arbitration in federal court without prejudice, and the Insurance Commissioner agreed to withdraw its motion for an Order to Show Cause re: Contempt without prejudice.  The parties stipulated that Fletcher could intervene in this case, and this Court would decide whether the Insurance Commissioner is required to arbitrate the dispute with Fletcher.  The Court now decides that motion. 

The Insurance Commissioner argues: “This Court has already entered injunctions barring parties from asserting offset rights against the Western General estate and from prosecuting arbitrations against Western General.”  (Petitioner’s Opposition, p. 10:21-22.)  That is not precisely correct.  The Court ordered that no party may “exercise[e] any right of set-off” without leave of the Court.  (Liquidation Order, ¶ 24.)  The Court ordered that no party may initiate an action, including an arbitration, “except upon order of this Court obtained after reasonable notice to the Commissioner as Liquidator.”  (Liquidation Order, ¶ 26.) 

Fletcher is entitled to seek payments owed under a reinsurance contract that was executed before the liquidation order.  (See Prudential Reinsurance Company v. Superior Court (1992) 3 Cal.4th 1118.)  However, because Fletcher is seeking these payments following a liquidation order, the issue must be litigated in this Court, per Insurance Code section 1032.  Specifically, the trial court must review the Insurance Commissioner’s decision to reject Fletcher’s claim “on an OSC” and the Court “must affirm the actions of the commissioner as conservator unless they constitute an abuse of discretion.”  (Garamendi v. Golden Eagle Ins. Co. (2005) 128 Cal.App.4th 452, 465-466.)  Simply, once General Western was placed in liquidation proceedings, the Insurance Code preempted the arbitration clause.  This is not unusual.  To the contrary, Fletcher’s argument is akin to an argument that a claim in bankruptcy must be sent to arbitration because the parties’ underlying contract contained an arbitration clause.  Like a bankruptcy court, this Court must resolve such issues.

Based upon the foregoing, the Court orders as follows:

1.         Fletcher’s motion to compel arbitration is denied.

2.         The Court issues an Order to Show Cause why the Court should overrule the Insurance Commissioner’s decision to reject Fletcher’s claim for a set-off.

3.         The Court sets the following briefing schedule:

            a.         Fletcher’s brief shall be due on ________.

            b.         The Insurance Commissioner’s brief shall be due on ________.

            c.         Fletcher’s reply brief shall be due on __________.

            d.         The Court shall hold a hearing on _______, at _______.

4.         Fletcher shall provide notice and file proof of such with the Court.