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Arbitration / Court Decisions

COURT CONFIRMS $443.5 MILLION ARBITRATION AWARD AND ORDERS $600 MILLION BOND

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The California Department of Insurance Conservation and Liquidation Office won a $443.5 million dollar arbitration award in favor of five Superior National Insurance Companies in liquidation. The award was against the United States Life Insurance Company, a subsidiary of AIG.

The arbitration arose out of a dispute of a 1998 reinsurance contract between U.S. Life and the five Superior National Companies. In 1999, U.S. Life initiated arbitration proceedings seeking rescission of the reinsurance contract, alleging misrepresentation and nondisclosure. The following year, Superior National, having suffered significant losses from its workers’ compensation business, became insolvent. California’s Insurance Commissioner seized the companies and placed them in conservation.

The arbitration panel denied U.S. Life’s claim for rescission, which was affirmed by the federal district court and Ninth Circuit. The arbitration panel then convened a second phase of arbitration to determine the amount of damages. The Final Arbitration Award ordered U.S. Life to pay the Superior National companies $443,515,724.

Following the district court’s confirmation of the award, the court entered a memorandum opinion requiring that U.S. Life post a $600 million dollar supersedeas bond (Order on bond memorandum decision) to provide adequate security for the judgment pending appeal. United States Life Ins. Co. v. Superior Nat'l. Ins. Co., Case No. 07-850 (USDC C.D. Cal.). This case is a consolidation of two cases.

This post written by Lynn Hawkins.

CONNECTICUT SUPREME COURT VACATES SUMMARY JUDGMENT INTERPRETING REINSURANCE AGREEMENT

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On September 24, 2007, we reported on a Connecticut Supreme Court decision addressing issues relating to a request for the posting of pre-pleading security in a case involving the interpretation of a reinsurance agreement covering losses on general liability insurance policies arising from claims for insuries resulting from the underlying insured's production and use of products containing asbestos. On remand, the principal issue on the merits of the dispute revolved around language in the reinsurance agreement relating to aggregation of losses and the definition of occurrence. The trial court granted summary judgment on that issue to the reinsurers. The Supreme Court has reversed, finding that there are disputed issues of material fact which preclude the determination of the interpretation issues in a summary judgment posture. Hartford Accident and Indemnity Co. v. Ace American Reinsurance Co., SC 17625 (officially released Dec. 25, 2007).

This post written by Rollie Goss.

UK COURT OF APPEALS AFFIRMS RULING THAT LLOYD’S NAMES CAN NOT SUE NATIONAL GOVERNMENT OVER IMPLEMENTATION OF AN EEC INSURANCE DIRECTIVE

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On November 28, 2006, we reported on a ruling by the UK Commercial Court that Lloyd’s Names did not have a cause of action against the government for alleged damages due to the improper implementation of an EEC Insurance Directive. The UK Court of Appeals has affirmed that decision, holding that the assumed failure to transpose the requirements of the Insurance Directive into national law can not be the basis for claims against the national government by the Names. Having disposed of the appeal on this issue, the Court of Appeals did not reach the alternative holding that the claims of the Names were barred by the statute of limitation. Poole v. Her Majesty’s Treasury [2007] EWCA Civ 1021 (Oct. 24, 2007).

This post written by Rollie Goss.

DAMAGES CALCULATION REVERSED – COMMISSION ADJUSTMENTS SHOULD HAVE BEEN BASED ON ‘INCURRED’ RATHER THAN ‘REASONABLE’ LOSSES

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Transatlantic Reinsurance Company (“TRC”), a reinsurer on non-standard automobile insurance policies, and Home State County Mutual Insurance Company (“Home State”) (the ceding and fronting carrier) sued Gamma Group, the agent responsible for binding and adjusting the policies, for breach of contract. The trial court concluded that Gamma breached its contract by failing to factor the run-off into its commission adjustment and instead retaining the premiums from which the adjusted commission payments were to be made.

Gamma appealed the trial court’s judgment arguing: (1) that the trial court erred in awarding damages under the contract because losses and loss adjustment expenses on run-off claims should not have been included in the commission adjustment; and (2) that the court erred in awarding statutory attorney’s fees. In a cross-appeal, TRC and Home State argued that the court erred when it construed the contract to imply that only “reasonable” run-off payments were to be included in the commission adjustment calculation.

The Texas Court of Appeals affirmed the trial court’s judgment on the right to recover damages for breach of contract and attorney’s fees, but reversed the trial court’s judgment with respect to the amount of damages reasoning that the trial court erred by reducing the damage award based on an implied term in the contract. The court stated that “[c]ourts do not rewrite contracts to insert provisions parties could have included or imply restraints for which they did not bargain,” and concluded that “[a]lthough the trial court refer[red] to its determination as a contract construction, it …, in effect, inserted an implied covenant requiring that loss payments be reasonable. Gamma Group, Inc. v. Transatlantic Reinsurance Co. & Home State County Mutual Ins. Co., No. 05-06-00156, (Tex. Ct. App., Dec. 3, 2007).

This post written by Lynn Hawkins.

COURT REFUSES TO VACATE ARBITRATION AWARD, FINDING NO MANIFEST DISREGARD OF LAW OR EVIDENT PARTIALITY

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In an arbitration regarding the purchase of securities, the losing party sought to vacate the award on the basis that it was in manifest disregard of law and that the arbitrator was biased. The court denied the motion, finding that the manifest disregard of law claim was not that the arbitrator disregarded the law, but that he simply erred in the application of applicable law, which even if proven does not constitute manifest disregard of law. The evident partiality contention was based upon alleged conduct of opposing counsel, and its potential affect upon the arbitrator, and the arbitrator’s reviewing of documents which he then declined to admit into evidence. The court easily found that such conduct did not constitute evident partiality, which requires a showing of specific facts that indicate improper motives on the part of an arbitrator. Williams Fund Private Equity Group, Inc., v. Engel, Case No. 06-2266 (USDC D.C. Nov. 7, 2007).

This post written by Rollie Goss.