The Southern District of New York federal confirmed an arbitral award related to a credit insurance policy claim over claims of manifest disregard of the law related to the materiality of misrepresentations in the insurance application. In the underlying credit agreement, HSBC Bank Brasil (“HSBC”) agreed to extend $50 million in credit to Casablanca International Holdings (“Casablanca”) with repayment guaranteed by Schahin Engenharia S.A. (“Schahin”). The credit insurers required HSBC to complete an application that included questions regarding past defaults, history of late payments, and repayment difficulties in the course of insuring the credit agreement if Schahin failed or refused to honor its guarantor obligations. When Casablanca eventually defaulted on its obligations and both Casablanca and Schahin filed bankruptcy, HSBC submitted a claim to the insurers. An arbitrator dismissed HSBC’s claims after finding that it made material misrepresentations in the insurance application that rendered the policy void ab initio, where HSBC denied knowledge of any circumstances that would raise the likelihood of loss.
The central dispute was whether the arbitrator manifestly disregarded the law on materiality of misstatements in an insurance application, specifically whether underwriters’ testimony alone can prove materiality.
First, the court found the arbitrator’s decision did not manifestly disregard the law on materiality. The court distinguished the cases cited by HSBC’s successor-in-interest because those cases all addressed the sufficiency of underwriters’ testimony in the context of motions for summary judgment. In the context of a summary judgment standard, the issue is whether underwriters’ testimony alone demonstrates materiality as a matter of law. In the present context, however, the parties did not move for summary judgment and instead conducted a full hearing on the merits. Therefore, the insurers in this setting were not required to prove material misrepresentation as a matter of law, but merely a matter of fact to the fact-finder. Furthermore, the court noted that even if the arbitrator incorrectly interpreted the law, he had a colorable justification sufficient to preclude vacatur.
Next, the court concluded that even if the insurers were required to introduce additional evidence of materiality beyond the underwriters’ testimony, it was satisfied they had done so. Specifically, the court noted that the issuance of the policy was “expressly conditioned” upon completion of the insurance application and the insurers’ satisfaction with the answers contained therein. Additionally, the court pointed to the plain text of the insurance policy, credit agreement, and insurance application, credit review reports produced, and New York law as all supporting the arbitrators’ determination that the misrepresentations were material.
Finally, the court granted the cross-motion to confirm the arbitral award. Pursuant to both the New York Convention and the Federal Arbitration Act, there are limited grounds that justify refusal to confirm an arbitral award. The court found none of the grounds articulated under either framework were satisfied in this case, and thus confirmed the award.
Banco Bradesco S.A. v. Steadfast Ins. Co., Case No. 18-331 (USDC S.D.N.Y. Sept. 7, 2018).
This post written by Thaddeus Ewald .
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