Commercial Risk Reinsurance Co. Ltd v. Security Ins. Co. of Hartford

Issue Discussed: Power of Arbitrators

Submitted by Michele L. Jacobson, Esq., Christian Fletcher, Esq.

Date Promulgated: November 30, 2007

Issue Decided:
1. Whether a Court may reexamine an arbitration panel’s decision to exclude, on untimeliness grounds, testimony and documents.
2. Whether an arbitration award that does not break down the total amount due as between two unsuccessful entities, even though the two entities’ liabilities were undisputedly several and not joint, is sufficiently definite to merit confirmation.
3. Whether an arbitration panel exceeds its authority when it rules on issues that are arguably outside the scope of the underlying contract being arbitrated.

The United States District Court for the Southern District of New York, in Commercial Risk Reinsurance Co. v. Security Ins. Co. of Hartford, denied a petition to vacate a reinsurance arbitration award, and granted a cross-petition to confirm it. The Court held that, despite contrary assertions in the vacatur motion: (1) the arbitrators were not guilty of misconduct, pursuant to 9 U.S.C. § 10(a)(3), when they excluded as untimely testimony and exhibits proffered by the losing parties on the issue of damages; (2) the award was definite enough to survive a challenge under 9 U.S.C. § 10(a)(4) even though it failed to allocate the total damage amount severally between the two separate losing entities, because the Court could simply condition confirmation on a stipulated allocation, and then modify the award pursuant to 9 U.S.C. § 11; and (3) the arbitrators did not exceed their authority by making rulings involving the scope of that authority, such as awarding damages based on policies that were arguably not covered by the underlying reinsurance agreements, awarding damages that arguably exceeded the reinsurance agreements’ limit of liability, and awarding interest that runs after the arbitration is over. 525 F. Supp. 2d 424, 433 (S.D.N.Y. 2007).

Commercial Risk Reinsurance Company Limited and Commercial Risk Re-Insurance Company (together, “Commercial Risk”) brought an action to vacate an arbitration award in favor of Security Insurance Company of Hartford (“Security”). Id. at 426. In the underlying arbitration, Security sought to recover losses arising from worker’s compensation programs that Commercial Risk had agreed to reinsure, pursuant to two reinsurance agreements (the “Treaties”) entered into by the parties in 1999 and 2000. Id. Under the Treaties, each of the two Commercial Risk entities agreed to accept a specific share of Security’s interests and liabilities associated with the worker’s compensation program written on Security’s paper. Id. When Commercial Risk refused to pay amounts billed by Security, contending that a portion of the losses were not covered under the Treaties, Security initiated the arbitration. Id.

The Treaties contained an arbitration clause that granted the arbitrators “the power to determine all procedural rules for the holding of the arbitration including but not limited to inspection of documents, examination of witnesses and any other matter relating to the conduct of the arbitration,” and included an “Honorable Engagement” provision directing that the arbitrators were to “interpret [the Treaties] as an honorable engagement and not merely as a legal obligation; they are relieved of all judicial formalities and may abstain from following the strict rules of law.” Id. at 426-27.

Pursuant to its authority under the Treaties, the arbitration panel set a discovery schedule. After the close of discovery, Commercial Risk proffered a witness to testify on the issue of damages. Then, two days before the hearing began, Commercial Union introduced documents they intended the witness to refer to. Id. at 428. Security objected to the introduction of both the witness and certain of the documents, alleging that it would be prejudiced by both the lack of sufficient notice and the inability to depose the witness. Id. The three-member panel unanimously agreed. Id. at 428-29. The record before the District Court revealed that the panel heard oral argument from both sides before issuing a ruling that, since the witness “was not on the witness list,” he would be precluded from testifying. Id.

Observing that an arbitration panel’s broad discretion, which parties confer when they agree to abandon the rigors of a judicial proceeding, was even further liberalized by the Treaties’ “Honorable Engagement” clause, the Court found “no justification for going behind the arbitrators’ interpretation and application of their procedural mandate[.]” Id. at 429. In so holding, the Court distinguished a Second Circuit case, Tempo Shain Corp. v. Bertek, Inc.,120 F.3d 16 (2d Cir. 1997), which held that an award must be vacated where the arbitration panel excludes, as cumulative, testimony on a topic that no other competent witness could address. Id. The Court found that the exclusion of evidence in Tempo Shain “amounted to a substantive ruling regarding the extent of the evidence,” while the exclusion in the instant case was “a factual finding in respect of an evidentiary ruling.” Id. The Court concluded that, “if the arbitrators make a factual and procedural determination that under their governing rules proffered evidence is untimely or not included in approved discovery schedules, absent evidence of misconduct that determination is beyond judicial review.” Id. at 430.

The District Court also rejected Commercial Risk’s argument that the award should be vacated on the grounds that it was insufficiently definite because it failed to preserve the several liability of the two Commercial Risk entities, directing both to pay a single amount of $20,754,990 plus interest. Id. at 431. Without disagreeing that the awarded amount should be broken down, the Court refused to vacate it and instead relied on its authority pursuant to 9 U.S.C. § 11 to correct an award “so as to effect the intent thereof and promote justice between the parties.” Id. Noting that the quota share percentages delineated in the Treaties offered a point of reference, it conditioned confirmation on a stipulated allocation of the award amount between the two Commercial Risk entities. Id.

Finally, the Court was not persuaded by Commercial Risk’s various arguments that the arbitration panel exceeded its authority. Id. at 432. Whether the panel was correct to award damages that were based on policies Commercial Risk contended were not covered by the Treaties, and that exceeded what Commercial Risk contended was the limit of liability set by the Treaties was, the Court held, a matter of contractual interpretation not subject to judicial challenge. Id. The panel also did not exceed its authority in granting post-award interest at ten percent, when the Treaties permitted it to award interest, without qualifying the type or fixing a cap at any particular rate. Id.

Commercial Risk subsequently moved for reconsideration of the Court’s ruling on the witness exclusion issue, arguing that the arbitration panel had improperly excluded their witness and evidence. Id. at 433. The Court denied the motion, emphasizing that the panel had considered the potential prejudice to Security arising from the lack of sufficient notice and opportunity to depose the witness, and that the panel’s decision was well within the broad authority delegated to it by the Treaties and the Honorable Engagement clause. Id. at 434.

* Michele L. Jacobson is a partner in the litigation department of Stroock & Stroock & Lavan LLP, concentrating her practice on insurance and reinsurance litigation and arbitration. Ms. Jacobson has 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.

Christian Fletcher is an associate in the litigation department of Stroock & Stroock & Lavan, LLP, focusing on reinsurance and tax certiorari matters.

Stroock & Stroock & Lavan LLP was counsel of record to Security Insurance Company of Hartford in the underlying arbitration, as well as the proceeding in the United States District Court for the Southern District of New York.