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Yasuda Fire & Marine Co. of Europe, Ltd. v. Continental Cas. Co.

Issue Discussed: Security

Submitted by Michael T. Carolan*

Date Promulgated: October 7, 1994

 

Yasuda Fire & Marine Co. of Europe, Ltd. v. Continental Cas. Co., 37 F.3d 345 (7th Cir. 1994)

Court: U.S. Court of Appeals for the Seventh Circuit

Issues Decided: 1) Whether an arbitration panel’s interim order requiring reinsurer to provide pre-hearing security through a $2.5 million letter of credit exceeded the panel’s powers; 2) Whether an award of interim security pending arbitration constitutes an “award” under the Federal Arbitration Act; and 3) Whether a district court’s refusal to vacate an interim security award is a “final decision” appealable under the Federal Arbitration Act.

 

In Yasuda Fire & Marine Co. of Europe, Ltd. v. Continental Cas. Co., the U.S. Court of Appeals for the Seventh Circuit affirmed an arbitration panel’s interim order requiring the reinsurer to post a $2.5 million letter of credit, holding that the panel did not exceed its powers.  The court also held that an award of interim security pending arbitration  does constitute an “award” under the Federal Arbitration Act (“FAA”) and that a district court’s refusal to vacate an interim security award is a “final decision” subject to appeal under the FAA.

The Arbitration

In the early 1980’s, Yasuda Fire & Marine Company of Europe, Ltd. (“Yasuda”) and Continental Casualty Company (“CNA”) entered into four reinsurance agreements, with Yasuda reinsuring CNA under each.  All four of the agreements contained arbitration provisions requiring the parties to submit disputes arising under them to a three-person arbitration panel.  Each agreement also required Yasuda to post letters of credit upon CNA’s request.

On April 3, 1992, CNA demanded arbitration against Yasuda to resolve CNA’s claim that Yasuda had failed to pay CNA its share of losses arising under policies ceded to the reinsurance agreements.  On June 2, 1992, Yasuda cross-demanded arbitration against CNA.  The parties met for a preliminary hearing  on November 30, 1993.  During it, the panel considered CNA’s request for preliminary security in the amount of $2,549,660 against a possible future arbitration award.  Granting the request, the panel ordered Yasuda to post an interim letter of credit in the amount of $2,549,660.

Yasuda filed a petition to vacate the panel’s pre-hearing security award in the U.S. District Court for the Northern District of Illinois.  The district court denied the petition sua sponte.  Yasuda appealed to the U.S. Court of Appeals for the Seventh Circuit.  The appellate court identified and resolved several separate issues.

The Court of Appeals Opinion

The first question resolved by the appellate court was whether an award of interim security pending arbitration constitutes an “award” under Section 10 of the FAA.  Because the interim award of pre-hearing security represented “a temporary equitable order[] calculated to preserve assets . . . needed to make a potential final award more meaningful,” the court found that it constituted an “award” under Section 10 of the FAA.

The second question resolved by the court was whether the district court’s refusal to vacate the panel’s interim security award was a “final decision” appealable under Section 16 the FAA.  Because the interim award was 1) subject to confirmation and vacation under the FAA and 2) resolved the issue of pre-hearing security such that any future awards by the arbitration panel “will be final awards with respect to separate claims,” the appellate court concluded the district court’s denial Yasuda’s petition to vacate was a “final decision” under Section 16 of the FAA.

The third question resolved by the court was whether the panel’s interim order requiring Yasuda to post a $2.5 million letter of credit for pre-hearing security exceeded the panel’s powers.  To answer this question, the court focused on whether the interim award of pre-hearing security “draws its essence” from the agreements between the parties.  Because the reinsurance agreement “contemplated that letters of credit were appropriate instruments of security in this transaction,” the court concluded that the panel’s interim award was within the panel’s powers.  As the court explained, “[i]f the panel were not to order the letter of credit, and Yasuda were to exhaust its reserves, the impact of the arbitration, indeed the meaning of the entire agreement between CNA and Yasuda, would be in serious doubt.”  The court also noted that the preliminary hearing transcript demonstrated that “the arbitrators engaged in the task of interpreting the agreement when they considered whether to order Yasuda to post the letter of credit,” including a discussion of whether the letter of credit section of the reinsurance agreement applied in arbitration.  Finally, the court emphasized “how important a wide range of remedies is to successful arbitration,” noting that even if an arbitration agreement does no articulate specific remedies, “that does not mean remedies are not available.”

Lastly, the appellate court denied Yasuda’s challenges to both the amount of the pre-hearing security award and the process by which the panel awarded it.  As to the amount, the court explained that it “will not question the arbitration panel’s interpretation of the agreement.”  As to the process employed by the panel, the court concluded the process of issuing an interim award at a preliminary hearing was fundamentally fair where “[e]ach party had notice of the preliminary hearing, had the opportunity to submit written arguments and exhibits, and had an opportunity to be heard.”

 

*Michael T. Carolan is a partner in the Insurance & Reinsurance group of Crowell & Moring LLP.  He represents cedents and reinsurers in disputes involving a broad spectrum of issues.