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Atlas Assurance Company of America v. American Centennial Insurance Company

Issue Discussed: Security

Submitted by Michael T. Carolan, Thomas J. Kinney*

Date Promulgated: January 16, 1991

 

Atlas Assurance Company of America v. American Centennial Insurance Company, No. 90 Civ. 5474 (SWK), 1991 WL 4741 (Jan. 16, 1991)

Court: U.S. District Court for the Southern District of New York

Issue Decided: Whether it was fundamentally unfair for an arbitration panel to issue an interim order requiring respondent to pay pre-hearing security without first holding a full hearing on the merits.

 

In Atlas Assurance Company of America v. American Centennial Insurance Company, the U.S. District Court for the Southern District of New York confirmed an arbitration panel’s interim award requiring a reinsurer to place either a portion or the entire amount of an interim award into escrow pending further proceedings, holding that the panel’s order was not fundamentally unfair.

The Arbitration

Atlas Assurance Company of America (“Atlas”) and American Centennial Insurance Company (“ACIC”) disputed how much ACIC owed under the reinsurance agreement between the parties.  Atlas demanded arbitration.  ACIC counterclaimed for an audit of Atlas’ records relative to the reinsurance agreement.

On June 21, 1990, following the organizational meeting, the arbitration panel directed ACIC to pay Atlas $379,035 and to place $156,278 into an escrow account as security pending further proceedings.  The panel also ruled that ACIC could audit Atlas’ accounts regarding certain issues still in dispute, but instructed ACIC to pay all future billings.  On August 1, 1990, however, the panel modified its order.  The modified order provided ACIC the choice of complying with the June 21, 1990 order, or placing into escrow the entire disputed amount of $535,313.

Both parties asked the U.S. District Court for the Southern District of New York to review the panel’s orders.

The District Court Opinion

ACIC asserted that the panel’s orders were fundamentally unfair because they followed only an organizational meeting, and not a full merits hearing with presentation of evidence and examination of witnesses.

The District Court disagreed.  While acknowledging that fundamental fairness was the “touchstone” for claims of arbitrator misconduct, the court concluded that there was “no violation of the ‘fundamental fairness’ principles in the arbitrators’ actions.”  In the court’s view, although the June 21, 1990 meeting was called an “Organizational Meeting,” the process was in fact more robust since “the arbitrators received, considered, and discussed the parties’ statements of issues and heard verbal statements by the parties’ representatives.”

As the court saw it, under such circumstances, ordering ACIC to place funds in an interest-bearing escrow account as interim security while offering them the  opportunity to audit Atlas’ files was “a reasonable interim step.”  In that vein, the court noted that the interim order “represents no risk or penalty upon ACIC, and no final adjudication on the merits of the case.”

The court concluded that ACIC “presented no valid basis for overcoming the ‘well established deference’” owed to the decisions of arbitration panels.

 

* Michael T. Carolan and Thomas J. Kinney 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.