Amerisure Mutual Insurance Co. v. Global Reinsurance Corporation of America

Issue Discussed: Power of Arbitrators

Submitted by Jennifer R. Devery, Michael T. Carolan

Date Promulgated: March 15, 2010

Issues Decided: Whether an arbitration panel’s award of attorney fees exceeded its powers and was a gross error of law based upon the terms of the reinsurance agreement and Illinois law.

In Amerisure Mutual Insurance Co. v. Global Reinsurance Corporation of America, the First District Appellate Court of Illinois vacated an arbitration panel’s award of attorney fees to Amerisure Mutual Insurance Co. (“Amerisure”) because it found that the panel exceeded its powers and committed a gross error of law. In doing so, the court held that neither the terms and conditions of the reinsurance contract, nor Illinois law, gave the panel the power to award attorney fees when one of the parties objected to the panel’s consideration of the issue.

The Arbitration

The reinsurance dispute began when Amerisure demanded payment of outstanding balances from Global Reinsurance Corporation of America (“Global Re”) due under an Umbrella Quota Share Reinsurance Agreement (the “Treaty”) between the parties. Pursuant to Article 24 of the Treaty, the dispute was to be resolved before a three-person arbitration panel in Chicago, Illinois. According to a choice-of-law provision also in Article 24 of the Treaty, Illinois law governed.

In its pre-hearing filings, Amerisure expressly sought to recover not only the outstanding principal balances and interest thereon, but also its own attorney fees and costs. Global Re opposed this claim, arguing that the panel had “no authority” to award such relief since both parties had not requested them and the Treaty did not authorize the panel to award attorney fees. In reply, Amerisure asserted that the panel had the ability to order such relief pursuant to both the traditional reinsurance principle of utmost good faith, and to Section 155 of the Illinois Insurance Code (“Section 155”), which punishes an insurer for vexatious and unreasonable actions or delays by allowing recovery of attorney fees as relief. Global Re denied that Section 155 applied to reinsurance relationships.

Ultimately, the arbitration panel awarded Amerisure the principal amount sought and interest, as well as attorney fees in an amount not to exceed $1.5 million, based upon the panel’s finding that Global Re violated its duty of utmost good faith to Amerisure. Specifically, the panel stated that attorney fees were awarded “based on a finding of…[Global Re’s] violation of its duty of utmost good faith to [Amerisure].”

Amerisure filed a motion to confirm the arbitration award in Illinois state court and Global Re filed an answer and counter application to vacate the award of attorney fees. Global Re argued that the panel exceeded its authority by awarding attorney fees because, among other things: (i) such remedy was not provided for in the parties’ arbitration agreement; (ii) the parties did not “collectively vest” the panel with the authority to decide the issue; (iii) Section 155 does not apply to reinsurance disputes; and (iv) Section 155 does not authorize arbitration panels to order the recovery of attorney fees, only courts. Global Re claimed gross error appeared on the face of the award.

The trial court denied Global Re’s counter-application, finding that the panel did not exceed its authority and issuance of the award did not amount to a gross error of law and confirmed the arbitration award, including the award of attorney’s fees.

On appeal, the First District Appellate Court of Illinois first held that Global Re did not waive the attorney fee issue by declining to bring a petition in state court to stay the arbitration and challenge the arbitrability of the authority of the panel to consider the attorney fee issue.

In sum, the appellate court held that Section 2 of the Illinois Uniform Arbitration Act is permissive and that Global Re preserved the attorney fee issue for judicial review by timely objecting to the panel’s consideration of the issue in the arbitration proceedings.

Second, the appellate court stated that “a violation of the duty of utmost good faith does not, in itself, provide a basis for awarding attorney fees” but that Amerisure’s position was that the violation of the duty of utmost good faith, in conjunction with Section 155, provided the panel a basis for awarding attorney fees. Nevertheless, because both parties did not request attorney fees (only Amerisure) and the arbitration agreement did not expressly provide for attorney fees, the appellate court held that “the parties agreed to arbitrate only those attorney fees authorized by Illinois law, as the chosen forum.” As to Illinois law, while the appellate court recognized that Illinois law permits the recovery of damages incurred as a result of unreasonable delays in the settlement of insurance claims, it found that Section 155 does not authorize arbitrators to award attorney fees and that, accordingly, the panel exceeded its authority. Specifically, the appellate court held that Section 155 does not permit an award of attorney fees by any tribunal other than a court of law. In the appellate court’s words, “Section 155 does not provide arbitrators with the authority to award attorney fees; the plain language of the statute reserves that authority to circuit courts.”

The appellate court noted that it did not “come to [its] decision lightly, without consideration of the deference given to arbitrators and the public policy behind arbitration.” It found, however, that the instant case was an extraordinary one where the arbitrators awarded attorney fees based upon a statute that clearly reserved the authority to award such fees to the courts.

Amerisure contended that the arbitration panel’s error amounted to merely a mistake of law and was not a sufficient ground to vacate the award of attorney’s fees. The appellate court disagreed, finding that the issue did not concern statutory interpretation, but an award that was clearly contrary to Illinois law.

Thus, while admitting that “on its face, the arbitrators awarded attorney fees based on [Global Re’s] violation of the duty of utmost good faith,” the appellate court stated that Illinois follows the “American” rule of only allowing a successful litigant to recover attorney fees if authorized by the parties’ agreement or statute, and that Amerisure and Global Re did not contract for the awarding of attorney fees in the event of a violation of the duty of utmost good faith. In addition, the court noted that Illinois law does not recognize a “bad faith exception” to the “American” rule.

Notably, the court explicitly declined to address whether Section 155 actually applies to reinsurance relationships, stating that even if Section 155 does apply to the reinsurance relationship, the arbitrators did not have the authority to award attorney fees pursuant to the statute.

* Jennifer R. Devery and Michael T. Carolan are partner and associate, respectively, in the insurance/reinsurance group of Crowell & Moring LLP. They each represent cedents and reinsurers in disputes involving a broad spectrum of issues.