Reinsurance Focus

In a pending dispute in the Southern District of New York arising from a quota share contract of reinsurance between Employers Insurance of Wausau, as reinsurer, and Nutmeg Insurance and Twin City Fire, as cedents, Nutmeg and Twin City argue that issues relating to the parties’ obligations with respect to specific claims arising out of the parties’ reinsurance treaties, and a process to resolve issues relating to those claims, are not yet final and the court therefore lacks jurisdiction to confirm those portions of an arbitration award. The petition to confirm the award, found here, sought to confirm, in part, the arbitration panel’s directive that Nutmeg and Twin City produce certain information and documentation to Wausau supporting the claimed loss at issue. Specifically, the panel directed Nutmeg and Twin City to produce evidence of proof of payment of the loss at issue, copies of the underlying policies at issue, and a narrative and reasonable documentation demonstrating that the loss was within the treaty’s terms.

At issue was the quantum and type of information that must accompany billing in order to trigger Wausau’s payment obligations and whether Wausau may withhold payment pending its request for additional, sometimes privileged, information and documentation. Wausau informed the court that Nutmeg and Twin City’s objections were moot because all parties had performed their obligations and the entire award was now final. The court directed Nutmeg and Twin City to file a letter with the court within five days from the date of its order indicating whether they will persist with their objections to the court’s confirmation of the entire arbitration award. Employers Insurance of Wausau v. Nutmeg Insurance Co., No. 14-CV-9284 (USDC S.D.N.Y. Feb. 25, 2015).

This post written by Renee Schimkat.

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Award Authorizing Class Action Litigation

Emilio v. Sprint Spectrum L.P., Case No. 14-732-cv (2d Cir. Nov. 12, 2014) (affirming denial of motion to vacate award; district court did not err by finding that arbitrator did not exceed powers nor manifestly disregard law when it ruled that Sprint could not be compelled to proceed with class arbitration and plaintiff could not be compelled to proceed with bilateral arbitration under state law, which the arbitration agreement stated would govern);

Emilio v. Sprint Spectrum L.P., Case No. 1:11-cv-03041 (USDC S.D.N.Y. Dec. 23, 2014) (denying motion to dismiss class action or strike class allegations; defendant collaterally estopped from relitigating basis for prior arbitration rulings authorizing class action litigation)

Manifest Disregard

NDV Investment Co. v. Apex Clearing Corp., Case No. 1:14-cv-00923 (USDC S.D.N.Y. Jan. 8, 2015) (denying motion to vacate FINRA award; granting cross-motion to confirm award; no manifest disregard of the law for misapplying FINRA rule or for the panel’s failure to permit a full hearing; no arbitrator “misconduct” for refusing to hear evidence);

Power Partners Mastec, LLC v. Premier Power Renewable Energy, Inc., Case No. 1:14-cv-08420 (USDC S.D.N.Y. Feb. 20, 2015) (granting petition to confirm nearly $3 million award; no manifest disregard of law; arbitrator’s findings were supported by the record);

Sotheby’s International Realty, Inc. v. Relocation Group, LLC, Case No. 14-253-cv (2d Cir. Jan. 6, 2015) (reversing district court’s order that vacated award as manifest disregard of law; court failed to apply test, which includes finding that relevant law was “clear,” determining that no “barely colorable justification” for the panel’s decision existed, and addressing alternate readings of the relevant law that might have supported the arbitrators’ decision)

Exceeding Authority

Seagate Technology, LLC v. Western Digital Corp., Case No. A12-1944 (Minn. Oct. 8, 2014) (affirming appellate court’s order reinstating $500 million arbitration award; defendants did not waive their rights to challenge the award, but a review of the merits of the award showed that arbitrator did not exceed authority by issuing punitive sanctions for defendants’ fabrication of evidence, which included excluding defendants’ evidence and defenses);

BNSF Railway Co. v. Alstom Transportation, Inc., Case No. 13-11274 (5th Cir. Feb. 6, 2015) (reversing order vacating arbitration award; court improperly reviewed merits of arbitrators’ interpretation of contract instead of limiting review to “whether the arbitrators even arguably interpreted the Agreement in reaching their award”)

Scope of FAA

Wiand v. Schneiderman, Case No. 14-11203 (11th Cir. Feb. 10, 2015) (affirming district court’s order compelling arbitration and denying motion to vacate award; court-appointed receiver’s “clawback” action against estate of investor in Ponzi scheme is not exempt from FAA; court did not err in referring validity of contract to arbitration; court did not err in holding arbitrator did not exceed powers; court would not review arbitrator’s evidence-based rulings)

This post written by Michael Wolgin.
See our disclaimer.

The Third Circuit recently ruled that a Pennsylvania statute prohibiting an unregistered businesses from maintaining any “action or proceeding” in any court in the state interferes with the enforcement of arbitration awards and therefore is preempted by the Federal Arbitration Act. The plaintiff was a non-registered company, but the parties had agreed that the arbitration could proceed and be administered under the rules of the American Arbitration Association. The district court confirmed the arbitration award, and the Third Circuit affirmed, holding that the FAA preempted application of the law because it rendered the arbitration agreement unenforceable, noting that the intent of Congress in enacting the FAA was to promote arbitration. Therefore, the Pennsylvania statute, by barring any “action or proceeding,” interfered with the enforceability of the FAA and therefore was preempted.

The issue of state statutes interfering with the enforcement of arbitration awards has been a subject of Reinsurance Focus blogs numerous times. Particularly, courts have examined state statutes that require the posting of security before a non-admitted company may file suit in that state. We will continue to monitor case law addressing whether other courts find that the FAA pre-empts similar pre-pleading security statutes.

Generational Equity LLC v. Schomaker, No. 14-1291 (3d Cir. Feb. 23, 2015).

This post written by Catherine Acree.

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A federal district court in New York confirmed an arbitration panel’s final award, but directed the parties to brief the issue of whether the continued sealing of supporting documents, filed in connection with the petition to confirm that award, was appropriate. Clearwater Insurance and the respondent insurance companies were parties to multiple reinsurance contracts and arbitrated their dispute concerning amounts billed under those contracts. Clearwater’s petition to confirm the arbitration award was unopposed and the court found no basis for vacating, modifying, or correcting it. The court did, however, question whether the continued sealing of documents, requested by both parties, was warranted. The documents were filed under seal because their public filing would allegedly violate a confidentiality agreement between the parties. This, the court found, did not justify the sealing nor overcome the strong presumption of public access to judicial documents. The parties were directed to submit additional briefing to the court on this issue. Clearwater Insurance Co. v. Granite State Insurance Co., No. 1:15-cv-00165 (USDC S.D.N.Y. Feb. 5, 2015).

This post written by Renee Schimkat.

See our disclaimer.

A federal judge in the Southern District of New York recently denied a motion to vacate an arbitration award in a reinsurance dispute, scolding the movant for complaining that the arbitrators reached a compromise verdict. The movant, the ceding insurer, argued that two of the three members of the arbitration panel had engaged in “manifest disregard of the law” by failing to properly apply the “follow the fortunes” doctrine when they disallowed reimbursement for several claims. The movant challenged a portion of the award holding that the reinsurer was not required to reimburse the movant for certain claims due to negligent claims handling and/or late notice. In a somewhat gruff opinion (“Petitioner’s argument is manifestly wrong . . . .”), the court stated that the movant “asks this court to do what it cannot do – review the award for correctness.” The court noted that all the relevant legal issues were placed squarely before the panel, that considerable evidence and argument was presented on those issues during a five-day hearing, and the evidence on the disputed issues “could be read either way.” In denying the motion to vacate and confirming the award, the court noted that the arbitrators were not required to follow “judicial formalities” in making their decision, and therefore were not required to predict what a court would hold. Rather, all that was required of them was that the decision have “colorable justification.” Apparently frustrated by the movant’s “manifest disregard of the law” argument, the court lectured: “If parties want the luxury of judicial review and reasoned results that require strict application of the law, without the sort of compromises that often characterize arbitral awards, they should not agree to arbitration clauses. Having done so, they should not be heard to complain when the arbitrators do what arbitrators so often do – reach compromise verdicts that can easily be justified by taking a particular view of the evidence.”

Associated Industries Ins. Co., Inc. v. Excalibur Reinsurance Corp., Case No. 1:13-cv-08239 (USDC S.D.N.Y November 26, 2014)

This post written by Catherine Acree.

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Following is a roundup of recent opinions on motions concerning the confirmation, vacation, and modification of arbitration awards, organized by the issues presented in the motions:

Public Policy

Potenciano L. Aggarao, Jr. v. Mol Ship Mgt. Co. Ltd., et al., Case No. 1:09-cv-3106-CCB (USDC D. Md. Aug. 7, 2014) (granting motion to vacate Philippine arbitration decision on the basis that it violated U.S. public policy because the foreign arbitrator improperly denied an injured seafarer the opportunity to pursue certain remedies to which he was entitled under U.S. general maritime law)

Jurisdiction

Ecopetrol S.A. et al. v. Offshore Exploration and Production, LLC, Case No. 1:14-cv-529-JGK (USDC S.D.N.Y. Sept. 10, 2014) (holding that an interim award was confirmable, that there was no manifest disregard of controlling law concerning the arbitrators’ jurisdiction, and that the arbitrators acted within the scope of their authority and in accordance with the rules governing the International Centre for Dispute Resolution)

Evident Partiality

Cellu-Beep, Inc. v. Telecorp Comm., Inc., Case No. 13-cv-7236-NRB (USDC S.D.N.Y. July 17, 2014) (finding no evident partiality where arbitrator suggested that a statute of limitations defense might apply where neither party had previously raised that issue)

Manifest Disregard

Gerald W. Hayden v. CISCO Sys., Inc., Case No. 3:12-cv-464-VLB (USDC D. Conn. Sep. 2, 2014) (denying motion to vacate, no manifest disregard in age discrimination case)

Galloway Construction, LLC v. Utilipath, LLC, et al., Case No. 3:13-CV-161-PLR-CCS (USDC E.D.Tenn. Oct. 21, 2014) (denying, on reconsideration, a motion to vacate an arbitration award based on alleged manifest disregard of the law)

Vito F. Cardinale, et al. v. 267 Sixth St., LLC, et al., Case No. 1:13-cv-4845 (USDC S.D.N.Y. Sep. 26, 2014) (no manifest disregard, arbitrator did not exceed his authority, award not “irrational”)

This post written by Catherine Acree.

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Randazzo Enterprises sued its reinsurer, Applied Underwriters Captive Risk Assurance Company, Inc. in California federal court over Applied’s calculation of premiums of the reinsurance agreement entered between them. Invoking the arbitration clause set forth in the reinsurance agreement, Applied filed a demand for arbitration and, in the pending federal case, moved to compel arbitration and to dismiss Randazzo’s complaint. The court determined it must first consider whether a valid arbitration clause exists and, if so, whether the arbitration encompasses the dispute at issue. To do so, the court found it must apply ordinary state law principles governing the formation and construction of contracts. Applying these principles to the facts before it, the court first rejected Randazo’s argument that the arbitration clause was unenforceable under Nebraska law which the parties agreed would govern. Nebraska law only applied to issues of substantive law and not to arbitration. Moreover, even if Nebraska law were to apply, it was preempted by the Federal Arbitration Act.

The court then turned to Randazzo’s argument that the arbitration agreement was unconscionable. Under California law, a contract must be unconscionable both procedurally and substantively in order to be rendered invalid. Here, because Randazzo had no opportunity to negotiate the arbitration provision, the agreement was an adhesion contract and therefore procedurally unconscionable. The Court then analyzed whether two specific provisions were substantively unconscionable. Under California law, a contract is substantively unconscionable when it is so one-sided that “it shocks the conscience.” The provision regarding the choice of arbitrator, requiring the arbitrators to be active or retired disinterested officials of insurance or reinsurance companies, was not substantively unconscionable. However, the provision which allowed only Applied to seek injunctive relief in Court was found substantively unconscionable, since it exceeded the rights afforded parties in an arbitration under California law and was so one-sided that it could not be justified as a legitimate commercial need. However, because California law permits a court to sever an unconscionable provision from an agreement, the parties’ agreement was not invalid because that one clause could easily be stricken without the need to reform the agreement. Finally, the court concluded that Randazzo’s claims related to the execution, delivery, construction or enforceability of the reinsurance contract, such that all of Randazzo’s claims were subject to arbitration. Randazzo Enterprises, Inc. v. Applied Underwriters Captive Risk Assurance Company, Case No. 5:14-CV-02374-EJD (USDC N.D. Cal. Dec. 11, 2014).

This post written by Leonor Lagomasino.

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On March 11, 2014, we reported on the First Circuit’s ruling in a contested arbitration between OneBeacon America Insurance Co. and certain of its reinsurers over reinsured asbestos claims. The reinsurers filed a declaratory relief action, seeking to preclude OneBeacon’s claims based on an adverse ruling that OneBeacon received in a previous arbitration against a different reinsurer. The First Circuit affirmed the order dismissing the action and compelling arbitration, holding that the preclusive effect of a prior arbitration award is an arbitrable issue and not an issue for the court to determine.

The arbitration has concluded and an award in favor of OneBeacon has been reached and confirmed by the court. The award found that the phrase “same causative agency” in the governing multiple line reinsurance treaty permitted OneBeacon to accumulate claims of multiple insureds and cede losses as a single occurrence, notwithstanding a contrary finding of the previous adverse arbitration award. The panel also determined the procedure by which OneBeacon must apply its self-insured retention across multiple treaty years. OneBeacon America Insurance Co. v. National Casualty Co., Case No. 1:14-cv-12570 (USDC D. Mass. Aug. 21, 2014).

This post written by Michael Wolgin.

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Reversing the Court of Chancery’s ruling vacating an arbitration award, the Delaware Supreme Court held in SPX Corporation v. Garda USA, Inc. that the arbitrator’s decision should have been affirmed because the arbitrator’s decision did not manifestly disregard the law. The award under review concerned whether SPX Corporation properly stated certain reserves on its balance sheets in connection with the sale of one of its subsidiaries to Garda World Security Corporation. The net purchase price for the subsidiary was subject to certain adjustments to the SPX balance sheets as set forth in the parties’ Stock Purchase Agreement (“SPA”). SPX was to provide Garda with a pre-closing balance sheet and an “Effective Date Balance Sheet” reflecting those adjustments. Post-closing, Garda challenged SPX’s calculation of the workers compensation reserve on the balance sheet and submitted the matter to arbitration, arguing the reserve calculation violated the SPA. After reviewing the parties’ briefs and addressing several rounds of questions to the parties, the arbitrator determined that SPX had not failed to comply with the SPA and that the balance sheets did not need to be restated. The arbitrator did not provide an explanation for its decision. Garda asked the Court of Chancery to vacate the award, which found that the arbitrator manifestly disregarded the SPA’s terms.

On appeal, the Delaware Supreme Court applied the Delaware Arbitration Act which provides that an arbitration award will be vacated when “the arbitrators exceeds their powers, or so imperfectly executed them that a final and definite award upon the subject matter submitted was not made.” The high court interpreted this provision as analogous to the Federal Arbitration Act which authorizes vacatur of an award where the arbitrator acts in “manifest disregard of the law.” This standard requires a party seeking vacatur to provide that the arbitrator was “fully aware of the existence of a clearly defined governing legal principle but refused to apply it, in effect, ignoring it.” The parties had submitted to the arbitrator two colorable interpretations of the relevant SPA provisions. While the arbitrator’s interpretation of those provisions may have been wrong, it was not without basis in the contract. Accordingly, under the “manifest disregard” standard, the arbitrator’s award was not subject to vacatur. SPX Corporation v. Garda USA, Inc., No. 332, 2013 C.A. No. 7115-VCL (Del. June 16, 2014).

This post written by Leonor Lagomasino.

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A transported liquid chemical had been found degraded after shipping from Texas to South Korea. The chemical company contended that the shipper was responsible for the losses as samples taken from the chemical prior to its transport tested satisfactorily. The dispute went to arbitration where the panel determined that the company failed to show that the chemical was damaged aboard the ship, and denied the claim. The chemical company attempted to vacate the award but the court found there was no manifest disregard of the law, because the petitioners could not show error beyond a possible erroneous interpretation of the Carriage of Goods by Sea Act, and in any event, “there [was] no indication the majority [of the panel] knew that was not the law but chose to hold petitioners to a different standard.” The court also found there was no misconduct by one of the arbitrators who failed to disclose that he was suffering from a terminal brain tumor at the time of his service on the panel, notwithstanding potential arbitration rule or ethics code violations. The nondisclosure did not cause prejudice and did not rise to “evident partiality or corruption” or misconduct under the FAA, under which “an arbitrator is under no duty to disclose medical conditions.” Finding no reason to vacate the award, the court ordered the award confirmed and granted the respondents’ motion to award attorney’s fees and costs incurred in connection with the motion to vacate. Zurich American Insurance Co. v. Team Tankers A.S., Case No 13cv8404 (USDC S.D.N.Y. June 30, 2014).

This post written by Michael Wolgin.

See our disclaimer.