Harper Insurance Limited v. Century Indemnity Company

Issue Discussed: Power of Arbitrators

Submitted by Michele L. Jacobson, Esq., Andrew S. Lewner, Esq

Date Promulgated: July 28, 2011

Issues Decided: Whether an arbitration panel, operating under an arbitration clause containing an honorable engagement provision, exceeded its authority by imposing a prepayment obligation upon reinsurers, where such obligation was not contained in the reinsurance agreement.

In Harper Insurance Limited v. Century Indemnity Company, the United States District Court for the Southern District of New York held that an arbitration Panel did not exceed its authority when it issued an order requiring the reinsurers to pay all losses billed under a reinsurance agreement within 106 days, regardless of whether the reinsurers disputed the losses. In so holding, the Court confirmed the arbitration award, stating that so long as the award “draws its essence from the agreement to arbitrate” or “has a barely colorable justification,” the panel acted within its authority, even if the specific relief granted was not requested by either party.

Background

Pursuant to a reinsurance treaty, effective from January 1, 1965 through December 31, 1967 (the “Treaty”), the Petitioners, a subset of a group of London Market reinsurers (the “LMRs”) agreed to reinsure Century Indemnity Company (“Century”) for, inter alia, liability relating to asbestos bodily injury lawsuits. Harper Insurance Limited, 2011 WL at *1. In addition to a follow the fortunes clause, the Treaty contained an honorable engagement clause which provided that the arbitrators “shall interpret this Agreement as an honorable engagement and shall make their award with a view to effecting the general purpose of this Agreement in a reasonable manner, rather than in accordance with a literal interpretation of the language.” Id.

In the early 2000s, commensurate with the unexpected increase in asbestos bodily-injury claims brought against insureds, the LMRs instituted certain Reinsurance Documentation Requirements (“RDRs”) that cedents would be required to satisfy in order to receive indemnification for asbestos claims.Id. Due to the “considerable bottleneck in LMR’s payment for asbestos claims” that resulted from the LMRs’ implementation of the RDRs, Century commenced arbitration against the LMRs under several reinsurance agreements to obtain a “global resolution of this dispute.” Id. Ultimately, eight separate arbitration panels were formed, each presiding over the dispute with respect to different reinsurance agreements. Id. Since the issues and contractual terms involved in each of the arbitrations was nearly identical, one of the panels, the “Hunter Panel,” held an evidentiary hearing and invited the other panels to attend and participate. Id. at *2. The panel issuing the arbitration award being challenged by the LMRs in their Petition, the “Powers Panel” attended.

Following discovery, submissions of memoranda of law and an evidentiary hearing, on October 24, 2006, the Hunter Panel granted Century, inter alia, the following relief:

Within 106 days of the delivery of a billing . . . LMRs must pay the entire amount billed or the undisputed portion plus 75 percent of the disputed portion, and present their written objections, if any, to full or partial payment, providing reasonable detail for the grounds for their objections.

Id.

On December 10, 2006, the Powers Panel adopted the relief granted by the Hunter Panel, issuing its “Interim Award.”¹ In so doing, the Powers Panel specifically noted that its decision did not preclude the LMRs from raising “any objection prior or subsequent to payment of disputed amounts.” Id. In fact, the Powers Panel retained jurisdiction in order to resolve any such disputes as they arose. Id.

During the following three-and-one-half years, neither Century nor the LMRs sought the Powers Panel’s assistance with the resolution of any claims paid pursuant to the Powers Panel’s order. Id. Thus, on May 10, 2010, one of the arbitrators from the Powers Panel emailed counsel for Century and the LMRs, asking whether it was “necessary or appropriate for the Panel to continue further jurisdiction in this matter.” Id. While the parties agreed that the Powers Panel should terminate its jurisdiction, the LMRs asked that the Powers Panel eliminate from its award the provision requiring 75% prepayment, arguing that making such a provision permanent would “improperly impose upon the parties rights and obligations that are simply not contemplated by the terms of the reinsurance contract.” Id. By contrast, Century asked that the Panel convert its December 10, 2006 interim award into a final award. Id.

On June 15, 2010, the Powers Panel issued a Final Award (the “Final Award”) , denying the LMRs’ request and making permanent its December 10, 2006 Interim Award. The LMRs subsequently brought the instant Petition to vacate the Final Award. Id. at *3. Century cross-moved to confirm the Final Award. In their Petition, the LMRs sought to vacate the Final Award pursuant to Section 10(a)(4) of the Federal Arbitration Act (“F.A.A.”), 9 U.S.C. § 10(a)(4) (“Section 10(a)(4)”), which provides for vacatur where “the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award on the subject matter submitted was not made.”

First, the LMRs argued that, by including the 106-day prepayment requirement in the Final Award, the Powers Panel ordered relief that “neither party requested, and therefore it did not rule on an issue ‘the parties agreed to submit . . . for arbitration.” Id. at *4. Second, since an arbitration Panel “cannot re-write a new agreement for the parties,” the LMRs argued that the Powers Panel exceeded its authority by “materially altering the Agreement to include a prepayment provision.” The Court rejected both of these arguments.

The Court began its analysis by noting that “it is well-settled that arbitration awards are ‘subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation.”² Id. at *3 (internal citation omitted). With respect to vacatur under Section 10(a)(4), the Court noted that “[t]he Second Circuit has consistently afforded the narrowest readings to the FAA’s authorization to vacate awards pursuant to Section 10(a)(4).” Id. (citing Banco de Seguros del Estado v. Mutual Marine Office, Inc. 334 F.3d 255, 262 (2d Cir. 2002). Moreover, “where an arbitration clause is broad, as here, arbitrators have the discretion to order remedies they determine appropriate, so long as they do not exceed the power granted to them by the contract itself.” Id.

The Court rejected the LMRs’ argument that vacatur was required because Century never specifically requested that the Panel issue an award containing a prepayment provision, stating that, even assuming that the LMRs were correct that Century did not request this relief,

[t]he LMRs’ argument “is unavailing” because such an argument “conflate[s] the question of whether an issue was presented to the arbitrators with the question of whether a potential remedy was presented to the arbitrators. It is indisputable that arbitrators have no authority to rule on an issue not submitted to them. However, there is no parallel per se rule that it is beyond the authority of the arbitrators to issue a remedy directed to an issue squarely before them unless it was requested by one of the parties.

Id. at *4 (emphasis in original) (citing First Potions of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943, 115 S. Ct. 1920 (1995).

In rejecting the LMRs’ position, the Court explained that a rule that requires arbitrators to grant only that relief that has been specifically requested by one of the parties, “is fundamentally at odds with the role of the courts in reviewing arbitration awards.” Id. at *5. In addition, the Court relied on the fact that the Treaty contained an honorable engagement provision which instructed the arbitration panel to “make their award with a view to effecting the general purpose of the agreement in a reasonable manner.” Id. at *5. As the Court explained, since “arbitration is a creature of contract,” because the parties included an honorable engagement provision in the Treaty, the LMRs “cannot now complain that the arbitrators granted relief that was not specifically requested by either party.”

Based upon the foregoing, the Court rejected the LMRs’ challenge to the arbitration award based upon the claim that the Powers Panel exceeded its authority by granting relief that was not specifically requested by either party. Id. The Court similarly rejected the LMRs; argument that, because the Treaty did not have a “Reports and Remittances” provision, the Powers Panel’s imposition of a prepayment requirement created an obligation for which the parties had not bargained. Id. at *5. While the Court was “sympathetic” to this concern, the Court concluded that the Treaty, even without a Reports and Remittances provision, “expected a prompt flow of funds between the LMRs and Century.” Based upon the inclusion of the honorable engagement provision, the Court concluded that “at a minimum” the Panel had “a barely colorable justification for its decision.” Id. at *5.

In finding that the Powers Panel’s inclusion of a prepayment provision did not exceed their authority, the Court distinguished the instant case from the recently-decided case of PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd., 659 F.Supp.2d 631, 636 (E.E.Pa. 2009) aff’d 400 Fed. Appx. 654 (3d Cir. 2010). In that case, faced with a similar honorable engagement clause to that before the Powers Panel, an arbitration panel was asked to resolve a dispute between a cedent and a reinsurer regarding a Deficit Carry Forward Provision in a reinsurance agreement. After hearing evidence, the arbitration panel ordered the cedent to pay the reinsurer $6,000,000, and further ordered that “upon such payment, any and all references to a deficit carry forward in the [reinsurance agreement will be] removed from the contract.”

Following the panel’s award in PMA Capital, the reinsurer sought vacatur in the United States District Court for the Eastern district of Pennsylvania. While the Court discussed the fact that an honorable engagement provision gives arbitrators “wide discretion to order remedies they deem appropriate,” the Court went on to state that “even broad discretion has its limits.” PMA Capital, 659 F.Supp.2d at 636. The Court ultimately concluded that the arbitration panel “evidently found the Deficit Carry Forward Provision to be more trouble than it was worth and simply eliminated it from the [reinsurance agreement]” and “in an apparent effort to compensate Platinum for this loss, the arbitrators also allowed Platinum to ‘carry forward’ one last deficit of $6,000,000, even though the parties agreed that the contractual precondition for such payment had not been met.” Id. Accordingly, the Court in PMA Capital found that the arbitration panel had exceeded its authority by “re-writing” the reinsurance agreement.

In the instant case, the Court distinguished the Powers Panel’s imposition of a pre-payment provision from PMA Capital on three grounds: (1) “The imposition of the prepayment provision does not violate any explicit provision of the contract itself;” (2) “The prepayment protocol is a legitimate interpretation of the contract’s implied expectation that claims would be paid promptly;” and (3) “unlike PMA Capital, the Powers Panel clearly explained their rationale and justification for the award, which it believes ‘effectuates the general purpose of the agreement of the parties.’” Harper Insurance Limited, 2011 WL 3366484 at *7. It bears mention that the Court took the LMRs to task for challenging the Powers Panels’ imposition of an obligation not specifically contained in the Treaty, when the LMRs had done precisely that by unilaterally imposing upon Century the RDR requirements. As noted by the Court: “[T]he notion that the reinsurers could themselves change the nature of the contract by requiring the RDRs and then think, when they are called to task for that, that the answer of arbitrators is limited to either exactly the thought that Century had or sort of a status quo ante is . . . wrong . . . Having improperly imposed their own terms into the contract, LMRs cannot reasonably complain that the arbitrators, with the mandate of an honorable engagement clause, constructed a remedy in an effort to even the balance of power and ensure that the contract will be performed properly going forward.” Id.

Based upon the foregoing, and upon the denial of the LMRs’ Petition to Vacate, the Court granted Century’s Cross-Petition to Confirm the Final Award.

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¹With respect to the 106 day requirement, while the reinsurance agreement before the Hunter Panel contained a Reports and Remittances clause from which the Hunter Panel derived this time period, the Treaty before the Powers Panel contained no such clause. In providing its rational for adopting this time requirement, the Powers Panel noted that “while the contract as issue does not contain a ‘Reports and Remittances’ clause as do many of the other agreements between the parties, a majority of the Panel is of the opinion that this provision effectuates the general purpose of the agreement of the parties.”

²The parties disputed whether the LMRs’ Petition was governed by the New York Civil Practice Laws and Rules (the “CPLR”) or the FAA. Under the CPLR, the Petition would likely have been time-barred. Id. at *3. Ultimately, the Court declined to decide the issue, stating that “regardless of the governing law or whether petition should be dismissed on equitable or limitations grounds, LMRs have not met their substantive burden for demonstrating that the arbitrators acted outside the scope of their authority.” Id.

* Michele L. Jacobson and Andrew S. Lewner are partners in the litigation department of Stroock & Stroock & Lavan L.L.P., concentrating their practice on insurance and reinsurance litigation and arbitration. Ms. Jacobson and Mr. Lewner have represented ceding companies, reinsurers, retrocessionaires, liquidators and intermediaries in a vast array of matters in state and federal courts, as well as before arbitration Panels throughout the country.