Patton Boggs Reinsurance Newsletter - December 2012: Texas Federal Court Denies Security Application for De Minimis and Premature Claims

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Gen. Fidelity Ins. Co. v. WFT, Inc., No. 3:11-cv-0448-P, 2012 U.S. Dist. LEXIS 148726 (N.D. Tx. Oct. 15, 2012).

In a dispute between a reinsurer and a managing agent, a Texas federal court declined to award security in aid of arbitration under a Texas statue that permits a party to file a security application with a court either during or after the conclusion of arbitration.  In the underlying arbitration, the reinsurer sought $4.5 million in commissions retained by the managing agent, $71,068.82 in retained bonus commissions and pre-award interest, and $2.5 million in additional commissions it believed would be due based on future performance of the book of business.  The arbitration panel denied the reinsurers claim for $4.5 million in retained commissions though it did award $71, 068.82 in retained bonus commissions and pre-award interest.  The panel deferred its decision on the remaining $2.5 million claim because the necessary reports to validate the claim had not yet been submitted.  In court, the reinsurer sought security for both the undisputed $71,068.82 it was owed, and for its still-pending $2.5 million claim.  The reinsurer argued that several outstanding federal tax liens levied by the Internal Revenue Service against the managing agent raised doubts about the agent’s ability to satisfy any judgment.

In denying the reinsurer’s security application, the court noted that although the applicable Texas statute did not specify any procedural safeguards a court must take into account to ensure fairness of any security, a court should, at a minimum, consider both parties’ arguments concerning the probable validity of the underlying claims.  Because the arbitration panel had deferred deciding on the $2.5 million future commission claim, the court determined that the reinsurer could not establish that it was likely to succeed on the claim.  The court therefore concluded that security for claims that the panel had determined were premature was not warranted.  Turning to the remaining $71,068.82 component of the security application, the court acknowledged that the managing agent did not dispute the validity of this award.  But because that amount was de minimis, and was possibly going to be offset by an award for attorney fees in the agent’s favor, security was not warranted in this instance either.

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