PMA Capital Ins. Co. v. Platinum Underwriters Bermuda, Ltd.

Issue Discussed: Honorable Engagement

Submitted by Robert A. Kole

Date Promulgated: November 8, 2010

Issues Decided: Whether an honorable engagement clause in a reinsurance contract could authorize an award that: (a) provided relief neither party specifically requested; and (b) eliminated a material provision of the contract.

Factual Background

PMA Capital Insurance Company (“PMA Capital”) and Platinum Underwriters Bermuda, Ltd. (“Platinum”) entered into a reinsurance contract, in which PMA Capital was the cedent and Platinum was the reinsurer. The reinsurance contract contained a “deficit carry forward provision,” by which Platinum was entitled to reimbursement for losses carried from one year to the next.

In 2008, a dispute arose over the proper application of the “deficit carry forward provision.” PMA argued that Platinum was not entitled to carry forward any losses from 1999-2001. Platinum contended that it was entitled to carry forward approximately $10.7 million in losses.

After an evidentiary hearing, the Arbitration Panel issued a one-page award which: (a) ordered PMA Capital to pay Platinum $6 million — an amount neither party sought — within 30 days; and (b) eliminated the “deficit carry forward provision” from the reinsurance contract. The District Court granted PMA Capital’s motion to vacate the award, and Platinum appealed from that Order.

The Holding

The Third Circuit affirmed the District Court’s Order vacating the arbitration award. After acknowledging that a court’s review of an arbitration award is “highly deferential,” the Court noted that, under §10(a)(4) of the FAA, courts should vacate an award only if: (1) “the form of the award cannot ‘be rationally derived either from the agreement between the parties or from the parties submission to the arbitrators,’ and (2) the terms of the award are ‘completely irrational.’” Id. at **4-5 (quoting Mut. Fire, Marine & Inland Ins. Co. v. Norad Reins. Co., 868 F.2d 52, 56 (3d Cir. 1989)).

Applying that deferential standard, the Court nonetheless agreed with the District Court that the relief awarded by the Arbitration Panel “exceeded the arbitrators’ powers because it was not sought by either party, and was completely irrational because it wrote material terms of the contract out of existence.” Id. at *5. The Court further agreed with the District Court’s conclusion that the Honorable Engagement Clause in the reinsurance contract did not authorize the Panel’s Award. The Third Circuit concluded:

We agree with the District Court in all respects. The arbitrators in this case, by ordering unrequested relief and rewriting material terms of the contract they purported to implement, went beyond the scope of their authority. That the honorable engagement clause permitted the arbitrators to stray from judicial formalities did not give them authority to reinvent the contract before them, or to order relief no one requested.

Id. at *6. Accordingly, PMA Capital is one of the rare cases in which a court has overturned an arbitration award under §10(a)(4) of the FAA.

* Robert A. Kole is the co-chair of the Insurance/Reinsurance Practice Group of Choate, Hall & Stewart LLP, as well as the co-chair of the ARIAS Law Committee.