Arbitration / Court Decisions

COURT DENIES MOTION TO VACATE ARBITRATION AWARD

January 9, 2008 by Carlton Fields

Commercial Risk Reinsurance Company Limited (“Commercial Risk”) brought this action to vacate an arbitration award against it and in favor of Security Insurance Company of Hartford (“Security”). In the underlying arbitration, Security sought to recover losses arising from workers compensation programs covered by two reinsurance agreements entered into by the parties in 1999 and 2000. In those contracts, Commercial Risk agreed to accept a certain share of Security’s interests and liabilities associated with the covered workers compensation programs insured by Security. Commercial Risk denied payments of amounts billed by Security under the treaties contending that a portion of the losses were not covered. The arbitration panel found in favor of Security.

Commercial Risk argued that the award should be overturned because: (1) the panel issued the Award jointly rather than severally against the two separate Commercial Risk entities; (2) the arbitration proceeding was fundamentally unfair because the panel excluded testimony of Commercial Risk’s witnesses and exhibits pertaining to damages; and (3) the panel exceeded its authority in a variety of ways. The Court rejected all of Commercial Risk’s arguments finding “no evidence that the arbitrators engaged in misconduct, or exceeded their authority, or that Security committed any fraud sufficient to vacate the Award.” Commercial Risk Reinsurance Co. Ltd. v. Security Insurance Co. of Hartford, Case No. 07 Civ 2772 (S.D.N.Y., Nov. 30, 2007). Commercial Risk’s motion for reconsideration also was denied. Commercial Risk Reinsurance Co. Ltd. v. Security Insurance Co. of Hartford, Case No. 07 Civ 2772 (S.D.N.Y., Dec. 12, 2007).

This post written by Lynn Hawkins.

ENGLISH REINSURANCE ASSETS TO BE REMITTED TO AUSTRALIAN LIQUIDATORS, BUT FOR WHAT REASON?

January 8, 2008 by Carlton Fields

In a July 12, 2007 post, we reported on issues relating to HIH Casualty and General Insurance Limited (“HIH”). The question before the court was whether it had jurisdiction to entertain a request under the Insolvency Act for directions to the liquidators in England to transfer assets collected by them to the liquidators in an Australian liquidation. The Court of Appeal held that it would not direct a transfer of the English assets by the English provisional liquidators to the Australian liquidators because to do so would prejudice the interests of many of the creditors. The House of Lords disagreed, allowing an appeal and ruling that the English assets of the insolvent insurer should be remitted to the Australian liquidator. There were sharp differences of opinion as to why exactly that should be the case.

The HIH group presented winding up petitions to the Supreme Court of New South Wales in 2001. Some of the assets, which consisted mostly of reinsurance claims on London policies, were situated in England, so English provisional liquidators were appointed. The Australian judge subsequently issued winding up orders and sent a letter to the High Court in London asking that the provisional liquidators remit the assets to the Australian liquidators for distribution in accordance with Australian law. The question on appeal was whether the English court could and should accede to the request. The alternative was a separate liquidation and distribution of the English assets under the English Insolvency Act of 1986. The manner of distribution mattered because Australian law generally gave priority to insurance creditors at the expense of other creditors, while the same result would not obtain under English law.

The decision was resolved primarily by analyzing the tension between section 426(4) of the Insolvency Act, which allows an English court with insolvency jurisdiction to assist designated foreign courts (including Australian courts), and section 426(5) of the same Act, which allows a court discretion to provide assistance in accordance with the rules of private international law, including the common law principle of “modified universalism.” That principle requires United Kingdom courts to cooperate with Australian courts to ensure that all the assets are distributed under a single system of distribution. While the court stated that a refusal to remit the assets might be appropriate if it causes a manifest injustice to a creditor, it ultimately found that the Australian distribution was not unacceptably discriminatory or contrary to public policy.

The dispute was focused on whether the basis of jurisdiction ought to be grounded in the common law considerations allowed by section 426(5) or the discrete statutory authority of section 426(4). Lord Hoffmann would have allowed the remission solely through the exercise of common law principles. He argued that under the common law doctrine of ancillary winding up, English courts may “disapply” parts of the statutory scheme by authorizing the English liquidator to allow actions he is obliged by statute to perform in accordance with English law to be performed by the foreign liquidator in accordance with foreign law. Others, including Lord Phillips, rejected this view: “I do not propose to stray from the firm area of common ground [of allowing the appeal under section 426] onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law.” Lord Neuberger, too, opposed Lord Hoffman’s view, stating that he took “the view that it would not have been open to an English court to make the order sought by the Australian liquidators in the absence of section 426(4) and (5) of the 1986 Act.” McGrath v. Riddell [2008] UKHL 21 (Apr. 9, 2008).

This post written by Brian Perryman.

ENGLISH COURT APPLIES PRINCIPLES OF CONTRACT CONSTRUCTION IN REINSURANCE DISPUTE

January 8, 2008 by Carlton Fields

Coromin, a Bermuda based captive insurer, sought indemnification from its reinsurers for physical damage and business interruption losses suffered by its insured as a result of a defective mill motor at a copper mining and processing facility in Chile. The reinsurance policy was an ‘all risks’ property cover with an exclusion for damage or business interruption caused by a defective condition due to design defect, but with an additional extension which reintroduced that element of cover with a form of wording on which the dispute centered. The reinsurers argued that the extension did not apply because Coromon failed to comply with one of four conditions of the extension clause.

The Court, relying on principles of policy construction set out in Absalom v TCRU [2006] 2LLR 129, found that each of the four requirements of the extension were met in respect of the defective mill motor. The English Court applied the following principles of construction: (1) examine and interpret terms in their contractual context; (2) take into account surrounding background matters, but exclude evidence of negotiations and subjective intent; and (3) reject a conclusion that “flouts business common sense.” These principles are generally consistent with contract construction in the United States. Coromin Ltd v AXA Re & Ors [2007] EWHC 2818 (Comm).

This post written by Lynn Hawkins.

COURT INTERPRETS REINSURANCE AGREEMENT BUT FINDS DISPUTE AS TO RESCISSION CLAIM

January 7, 2008 by Carlton Fields

A New York state court, in an action involving claims under a quota share reinsurance of insurance issued to automobile financing institutions covering the residual value of motor vehicle leases, has resolved some issues as to the interpretation of the reinsurance as a matter of law, finding no ambiguity in the quota share agreements. At the same time, the court denied summary judgment on a claim to rescind the reinsurance on the basis that the cedent had not disclosed to the reinsurer, at the time the reinsurance was placed, that its own actuary had projected a loss ratio of over 100% on the underlying risks. The court found that there was a disputed issue of fact as to when the cedent had knowledge of high losses, but that if it was established that the cedent had such knowledge at the time of placement, rescission would be appropriate. The interpretation issues included such important issues as determining that an entire block of risks could not be ceded to the quota share agreement and the percentage of the pool reinsured by a particular quota share reinsurer. Gulf Insurance Co. v. Transatlantic Reinsurance Co.,. No. 601602/03 (N.Y. Sup. Ct. Nov. 21, 2007).

This post written by Rollie Goss.

SUPREME COURT HEARS ORAL ARGUMENT ON WHETHER PARTIES MAY SUPPLEMENT ARBITRATION AGREEMENTS BEYOND FAA’S VACATUR STANDARDS

January 3, 2008 by Carlton Fields

The Supreme Court recently heard oral arguments on whether an arbitration agreement may provide for more expansive judicial review of an arbitration award than the narrow standard of review provided for in the Federal Arbitration Act. This case arose out of a property lease dispute between Mattel, the well-known toy manufacturer, and its landlord, Hall Street Associates. The parties agreed to arbitrate the dispute pursuant to the FAA procedures, but also agreed that a district court could overrule the arbitrator’s decision if the arbitrator’s “conclusions of law [we]re erroneous.”

The Ninth Circuit barred this type of court review, reasoning that private parties cannot expand the Congressionally-determined role of courts in reviewing arbitration awards. In contrast, the First, Third, Fourth, Fifth, and Sixth Circuits appear to have interpreted the FAA’s vacatur standards as non-exclusive standards which parties may supplement by agreement. While the Seventh Circuit has not squarely addressed the issue, it stated in dicta that the parties “cannot contract for a judicial review” of a labor arbitration award “because federal jurisdiction cannot be created by contract.”

After hearing oral arguments on the issue, the Supreme Court asked for additional briefing on three issues: (1) whether authority exists outside the FAA under which a party to litigation begun without reliance on the FAA may enforce a provision for judicial review of an arbitration award; (2) if such authority does exist, did the parties, in agreeing to arbitrate, rely in whole or part on that authority; and (3) whether the petitioner waived any reliance on authority outside the FAA for enforcing the judicial review provision of the parties’ arbitration agreement.