As we observed in last year's reinsurance review, 2011 was marked by a notable amount of litigation over the disqualification of counsel. At that time, it appeared that disqualification of counsel was one of the few areas of authority courts were not willing to cede to arbitration panels. Litigation in this area continued in 2012.
In Certain Underwriters at Lloyd's, London v. Sidley Austin, LLP, No. 10-4663-BLS2 (Sup. Ct. Mass. Mar. 5, 2012), a Massachusetts state court dismissed an action to disqualify counsel. There, the cedent in a reinsurance dispute with Lloyd's over asbestos losses hired a law firm that had allegedly contemporaneously represented Lloyd's in an appeal of an injunction proceeding in another matter in which Lloyd's underwrote a direct insurance policy. Complicating things further was the potential involvement of Equitas and its claims management service company in the U.S. Essentially, the claims management service hired the law firm on the direct matter on appeal, while the cedent had hired the law firm on the reinsurance dispute arising out of a reinsurance contract. In denying the application to disqualify counsel, the court found that there was a conflict caused by the concurrent representation of the cedent in a reinsurance claim against Equitas and Lloyd's and Equitas in the appeal. The court also found that the conflict was disclosed to the cedent and obtained the cedent's waiver of the conflict. In addition, the court found that the conflict was adequately disclosed to Lloyd's/Equitas and that a binding valid waiver was obtained.
Not all courts, however, accepted the opportunity to substantively rule upon the issue of disqualification of counsel. In Utica Mut. Ins. Co. v. INA Reinsurance Co., 468 Fed. Appx. 37 (2d Cir. 2012) (Summary Order Without Precedential Effect), the Second Circuit affirmed the appeal of a denial to disqualify. There, the cedent appealed the denial of its motion to disqualify a firm as counsel for the reinsurer, along with various related discovery issues. The Second Circuit held that the district court had not abused its discretion in denying cedent's motion to disqualify the reinsurer's counsel, but because they had not been raised at the trial court level, the court took no substantive position on the two bases for disqualification raised on appeal: first, whether the district court should have applied New York law due to the matter having been removed from New York state court; and second, whether an ethical wall could be sufficient to rebut the presumption of disqualification of a law firm where the conflicted attorney possesses material information about a former client. Because the reinsurer voluntarily accepted the district court's discovery prophylaxis, the Second Circuit determined that this issue was irrelevant to the disqualification motion.
In Nat'l Cas. Co. v. Utica Mut. Ins. Co., No. 12-cv-657-bbc, 2012 WL 6190084 (W.D. Wisc. Dec. 12, 2012), a Wisconsin federal court also declined to substantively rule on the question of counsel disqualification. It had found that no basis for federal subject matter jurisdiction existed, and instead remanded the issue to state court.
In this case, the cedent's counsel had served as defense counsel in the underlying coverage dispute. The reinsurer claimed that this caused a conflict of interest, because counsel represented both the reinsurer's and the cedent's interests in the coverage litigation. When the cedent refused to replace its counsel, the reinsurer filed this action to disqualify counsel in state court, which the cedent removed to federal court. The Wisconsin federal court ultimately remanded the action back to state court after finding that the cedent had not shown that federal subject matter jurisdiction was present. Although the amount in controversy was eventually identified and exceeded $75,000, the court had an issue concerning whether the amount in controversy in the arbitration was the proper measure for the disqualification action as the object of the disqualification litigation was not compelling arbitration or confirming an arbitration award. The court remanded essentially because it would not adopt the stakes in arbitration as the measure for subject matter jurisdictional purposes.