Reinsurance Focus

In a case involving a dispute over steel production to replace a portion of the Whitestone Bridge spanning New York City’s East River, a federal district court remanded an arbitration award back to the arbitrator. Under the parties’ arbitration agreement, the arbitrator was to issue a reasoned award. However, the arbitrator’s award was a two-page award with the “arbitrator merely list[ing] various categories of monetary damages without explanation as to how he calculated those figures or determined liability.” Under the Southern District of New York standard, a reasoned award is one where the arbitrator presents “something short of findings of fact and conclusions of law but more than a simple result. Where the award offered no more than the damages, the court found that this low standard was not met.

The court chose not to vacate the award, however. Noting that some courts have completely vacated the award where arbiters have ignored the arbitration agreement and exceeded their powers, the court found that the doctrine of functus officio (once the award is made, the duty is done) was inapplicable. Because the arbitrator never completed his duty, the court found that remand to do so was proper. Tully Const. Co. v. Canam Steel Corp., No. 1:13-cv-03037-PGG (USDC S.D.N.Y. Mar. 2, 2015).

This post written by Zach Ludens.

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In a case involving a FINRA arbitration between investors and their financial advisor, Judge Anita S. Brody of the United States District Court for the Eastern District of Pennsylvania found that she did not have the jurisdiction to hear a challenge of the arbitration award. Though FINRA rules may be subject to heavy federal regulation and approval by the SEC, the court found that this was not enough to create a federal question to give the court jurisdiction over the challenge. Instead, the court found that under § 10 of the Federal Arbitration Act, review of an arbitration award with underlying federal questions does not in itself implicate a federal question sufficient for jurisdictional purposes. This is because where there is no merits review, “the substance of the underlying arbitration is generally irrelevant to a district court’s consideration of a motion to vacate.” Instead, the motion to vacate must raise a federal question on its face. The court further held that an argument of manifest disregard of federal law in such an instance was still heard as a claim under § 10 of the Federal Arbitration Act, which is “something of an anomaly in that it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 or otherwise.” Accordingly, the court dismissed the case for lack of subject-matter jurisdiction. Goldman v. Citigroup Global Markets Inc., No. 2:12-cv-04469-AB (USDC E.D. Pa. May 19, 2015).

This post written by Zach Ludens.

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A federal district court has entered judgment confirming an arbitration award entered in favor of Employers Insurance Company of Wausau against Continental Casualty. The dispute arose out of a certificate of casualty facultative reinsurance between the parties. At issue was Continental’s obligation under the certificate with respect to one claim submitted by Wausau. Wausau demanded arbitration with Continental under the certificate and the panel, without hearing oral argument on the parties’ motions for summary adjudication, issued its award. Continental did not object to Wausau’s prejudgment interest calculation on the award nor did it answer Wausau’s petition to confirm the award. By Order dated January 26, 2015, the court confirmed the award and directed the clerk of court to enter judgment thereon. The judgment was entered on February 20, 2015. Employers Insurance Co. of Wausau v. Continental Casualty Co., No. 1:14-CV-09192 (USDC S.D.N.Y. Feb. 20, 2015).

This post written by Renee Schimkat.

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In a case involving a dispute between a not-for-profit corporation administering a self-insured group workers’ compensation fund and their investment advisor and broker-dealer, the Supreme Court of Alabama granted the fund’s motion to vacate an arbitration award in the advisors’ favor. The arbitration was conducted pursuant to FINRA’s rules for arbitration proceedings, which call for the selection of a three-arbitrator panel. However, because the court found that one of the arbiters failed to disclose a potential conflict of interest prior to his selection, it reversed the panel’s award. The arbiter was a vice president and partner in a financial-services firm that had served as a co-underwriter with the advisors on 36 equity and debt issuances, had been codefendants with the advisors in a number of lawsuits, was represented by the same counsel as the advisors, and had involvement with the investment product alleged in this lawsuit. This was enough to constitute a “reasonable impression of partiality” even though the arbiter claimed that he did not know about this relationship on behalf of his firm. Applying the constructive knowledge doctrine, the court found that there was “evident partiality” on the part of the arbiter and reversed the arbitration award under the Federal Arbitration Act. The lower court had refused to disturb the award, necessitating the lower court’s reversal as well. Municipal Workers Compensation Fund, Inc. v. Morgan Keegan & Co., No. 1120532 (Ala. Apr. 3, 2015).

This post written by Zach Ludens.

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A Special Focus article by Rollie Goss discusses a Court of Appeals opinion which gives practical effect to the honorable engagement provision of a reinsurance agreement.

This post written by Rollie Goss.

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A federal district court has confirmed a $14 million arbitration award entered in favor of Amerisure against its reinsurer Everest. As we earlier reported, the court had previously denied the motion to seal briefing associated with Amerisure’s motion to confirm the award. Now at issue was the confirmation, modification, or vacatur of the award, which directed Everest to indemnify Amerisure for its share of asbestos losses that fell within the parties’ reinsurance treaties. Everest moved to vacate the award on several grounds, including an arbitrator’s “evident partiality” in the proceedings and the panel’s allegedly erroneous procedural and evidentiary rulings. At the core of the reinsurance dispute was whether Amerisure could aggregate individual asbestos losses into a single occurrence in order to exceed the applicable retention and thereby qualify for indemnification under the reinsurance treaties. The panel held that Amerisure could aggregate the losses by relying, in part, on what it found to be the “commonly accepted” business of treating multiple asbestos losses as a single occurrence. The panel rejected the argument that Amerisure’s claim was precluded or undercut by the fact that the underlying claims were settled as individual losses and further discounted the expert opinion testimony offered by Everest as unpersuasive. The district court, in turn, affirmed the award, rejecting all arguments of partiality or erroneous rulings. While Everest had established the panel exceeded its powers in one respect, it did not find that warranted vacatur or modification of the award. Amerisure Mutual Insurance Co. v. Everest Reinsurance Co., Case No. 14-cv-13060 (USDC E.D. Mich. Mar. 18, 2015).

This post written by Renee Schimkat.

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An arbitration award to Petitioner, Employers Insurance of Wausau A Mural Company (“Wausau”), has been confirmed after Respondents withdrew their prior objections.  The dispute arose over payment obligations stemming from a Quota Share reinsurance agreement between the Respondents, Nutmeg Insurance Company and Twin City Fire Insurance Company (“Nutmeg/Twin”), and Wausau. The dispute went to arbitration where a panel, finding in favor of Wausau, directed Nutmeg/Twin to provide documentation relating to the claim of loss— including proof of payment and a narrative on the appropriateness of a loss settlement award.

Nutmeg/Twin subsequently objected to Wausau’s petition to confirm the award on jurisdictional grounds for “non-final issues,” specifically the parties’ obligations under various remaining claims. Wausau argued that Nutmeg/Twin’s objections were moot as the parties’ obligations had been performed. The court, however, did not need to resolve this question as Nutmeg/Twin withdrew their arbitration award objections as part of a settlement arrangement.  Employers Insurance of Wausau v. Nutmeg Insurance Company, Case No. 14-CV-9284 (USDC S.D.N.Y. Mar. 10, 2015).

This post written by Matthew Burrows, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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The First Circuit Court of Appeals recently reversed the district court’s vacatur ruling and remanded the matter for entry of an order confirming an arbitration award. While the First Circuit found that several of the arbitration panel’s holdings may have been erroneous, the court held that “even serious error” by arbitrators will not invalidate an award and, further, “any error by the panel . . . does not rise to the level necessary to justify vacatur.”  Plaintiff Robert Fenyk filed a complaint in Vermont state court alleging Raymond James Financial Services (RJFS) fired him because of his sexual orientation and his status as a recovering alcoholic in violation of Vermont employment laws. RJFS countered that Fenyk should not be afforded the protections of Vermont employment law because Fenyk was not an employee. RJFS also moved to compel arbitration pursuant to a previously signed agreement between the parties. Fenyk dismissed the suit and submitted his claims to arbitration.

In arbitration, Fenyk sought to amend his proceeding to bring additional claims under federal, New York, and Florida law. The arbitral panel denied Fenyk’s motion to amend but did award him $600,000 in back pay and $36,042.03 in attorney’s fees and costs. RJFS challenged the award in the district court, arguing that the arbitration panel had misapplied Florida law, the state where Raymond James is based. RJFS further argued that Fenyk’s claims were made beyond the one-year statute of limitations for civil rights cases, and therefore barred. The district court agreed with these positions and vacated Fenyk’s previous award, finding that the arbitrators had exceeded their authority.

A panel of three First Circuit judges unanimously reversed, remanding for the entry of an order confirming the arbitration award.  The Court held that although there was uncertainty as to whether the arbitrators had correctly applied applicable law, even “serious error” of law is not a basis for invalidating an arbitration award, and the uncertainty did not establish that they had exceeded their authority under the arbitration provision.   Raymond James Fin. Servs., Inc. v. Fenyk, 780 F.3d 59 (1st Cir. 2015) (No. 14-1252).

This post written by Whitney Fore, a law clerk at Carlton Fields Jorden Burt in Washington, DC.

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Organizational Strategies Inc. (OSI) had entered into an agreement with Capstone Associated Services Ltd. for the latter to form three captive insurance companies for OSI. Included in the contract was an arbitration clause that required any disputes to be resolved under American Arbitration Association rules. PoolRe (a third-party insurer), and the three captive insurers separately entered into contracts that included different arbitration provisions requiring application of International Chamber of Commerce rules. Ultimately, all of the agreements were cancelled, and Capstone demanded arbitration for breach of contract against OSI under AAA rules. When PoolRe sought to compel a separate arbitration and was unable to appoint an Anguilla-based arbitrator through the mechanism envisioned under its contracts, PoolRe intervened in the OSI arbitration for the “limited purpose of having [the arbitrator] appoint an Anguilla-based arbitrator.” Instead of appointing an Anguilla arbitrator, however, the OSI arbitrator applied AAA rules and exercised jurisdiction over PoolRe’s claims, finding that PoolRe had waived its right to arbitration in Anguilla by intervening. An award later issued, finding that OSI had breached its contracts with Capstone, PoolRe, and a law firm involved with the captive insurance program. The arbitrator granted Capstone, PoolRe and the firm more than $450,000 in attorneys’ fees, expenses and costs.

OSI moved to vacate the entire award in Texas federal court on the grounds that the arbitrator exceeded his authority by including PoolRe in the arbitration; the arbitrator was not authorized under the contracts to appoint himself as the arbitrator of PoolRe’s claims nor to apply AAA rules instead of ICC rules. The court agreed and vacated the entire award, reasoning that PoolRe’s intervention had “tainted the entire process.” The Fifth Circuit affirmed, holding that because the arbitrator “acted contrary to the express arbitrator- and forum-selection clauses in the arbitration agreements to which PoolRe was a party” the district court’s holding that the arbitrator exceeded his authority would be affirmed. The Fifth Circuit further explained that a district court does not err “by failing to vacate in part, particularly where the arbitrator awarded a lump sum ‘to be divided among the parties as they see fit.’” PoolRe Insurance Corp. v. Organizational Strategies Inc., No. 14-20433 (5th Cir. April 7, 2015).

This post written by Michael Wolgin.

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In First State Insurance Company v. National Cas. Co., 2015 WL 1263147, No. 14-1644 (1st Cir. March 20, 2015), the U.S. Court of Appeals for the 1st Circuit (the “Court of Appeals”) affirmed the lower court’s refusal to vacate an arbitration award involving contract interpretation and addressed the operation and effect of an “honorable engagement provision” in an arbitration clause.

In this case, the Appellant/Reinsurer sought to vacate a contract interpretation award involving eight reinsurance and retrocessional agreements because the arbitrators exceeded their scope of powers by re-writing the terms of the parties’ agreements. Specifically, the Appellant/Reinsurer asserted that the payment protocol set forth in the arbitration award was not based on the parties’ agreements and obligated Appellant/Reinsurer to pay billings that may not fall within the terms and conditions of the agreements. The Appellant/Reinsurer further asserted that the payment protocol would foreclose or impair its broad access rights under certain inspection and audit provisions of the agreements by conditioning those rights on the transmittal of an appropriate time-of-payment reservation of rights.

Regarding the payment protocol, the Court of Appeals determined that the payment protocol in the award tracked the plain language of the relevant portions of the parties’ reinsurance agreements. Concerning the challenge to the reservation of rights procedure, the Court of Appeals noted that the arbitration clauses for the reinsurance agreements contained an honorable engagement provision, which directed the arbitrators to consider each agreement as an “honorable engagement rather than merely a legal obligation” and further stated that the arbitrators “are relieved or all judicial formalities and may abstain from following the strict rules of law.” The Court of Appeals held that the honorable engagement provisions empowered arbitrators to grant forms of relief, including equitable remedies not explicitly mentioned in the underlying agreement. The Court of Appeal viewed the honorable engagement provisions as enhancing the prospects for a successful arbitration because they provided the arbitrators with the flexibility to custom-tailor remedies to fit particular circumstances.

This post written by Kelly A. Cruz-Brown.

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