Arbitration / Court Decisions

INTERESTING DECISIONS ON ARBITRATION AWARDS

November 8, 2007 by Carlton Fields

Four recent opinions address interesting issues in the confirmation of arbitration awards:

In Extendicare Health Services, Inc. c. District 1199P Service Employees International Union, No. 06-4768 (3d Cir. Oct. 26, 2007), the court affirmed a district court decision finding that the reinstatement of an employee by an arbitrator in a labor arbitration was not contrary to public policy. This opinion contains a rather extended discussion of the public policy issue analysis.

In Lagstein v. Certain Underwriters at Lloyds of London, Case No. 03-1075 (USDC D. Nev., Aug. 15, 2007), an insurance bad faith case, the arbitration panel awarded $900,000 in compensatory damages, $1.5 million in bad faith compensatory/emotional distress damages, $4 million in punitive damages and $350,000 in attorneys’ fees. The district court found that this award “shocks the Court’s conscience, is biased, and cannot stand.” The court further found that the damages were unsupported by the record and in manifest disregard of law, that the punitive damage award exceeded the jurisdiction of the arbitration since it awarded damages for a time period that the parties had expressly agreed was beyond the scope of the arbitration, and that the size of the punitive damage award was excessive.

In Hendrik Delivery Service, Inc. v. St. Louis Post-Dispatch LLC, Case No. 07-1516 (USDC E.D. Mo. Oct. 19, 2007), the court confirmed an arbitration award of $892,000 in compensatory and $750,000 of punitive damages in a business dispute. The losing party sought to vacate the award, essentially arguing that the arbitrator made the wrong decision. The court found no manifest disregard of law, and refused to vacate the award.

In Van Pelt v. UBS Financial Services, Inc., Case No. 05-477 (USDC W.D. N.C. Oct. 12, 2007), the court denied a motion to vacate an arbitration award of $2.4 million for wrongful termination of a financial advisor. The employer contended that the award should be vacated because: (1) the award was not drawn from the essence of a contract; (2) the panel manifestly disregarded the law; (3) the panel exceeded its power in making the award; and (4) the award violated public policy. The court denied the request to vacate the award. The critical point in this opinion is that since the award was not a reasoned award, and hence the panel did not explain the bases for its decision, there was an insufficient record upon which to vacate the award.

COURT DISMISSES REINSURER’S BAD FAITH CLAIMS AGAINST CEDENT’S PARENT COMPANIES

November 7, 2007 by Carlton Fields

A Pennsylvania district court dismissed bad faith and fiduciary duty claims brought by a reinsurer against a cedent’s corporate parents. Plaintiff, Gaffer Insurance Company, reinsured policies issued by Discover Re, a subsidiary of U.S. Fidelity and Guaranty Co., which is in turn a subsidiary of St. Paul Travelers Cos. Inc. Pursuant to the agreement, Gaffer posted $4 million dollars to secure its obligations. When the agreement terminated and Gaffer asked Discover to release up to 3.8 million of those funds, Discover never responded. Gaffer filed suit and the defendants moved to dismiss for failure to state a claim, or alternatively, to compel arbitration.

The court ordered arbitration between Gaffer and Discover Re pursuant to the agreement’s arbitration provision. With respect to Gaffer’s claims against Discover Re’s parent companies, the court concluded that Gaffer failed to state a claim against those defendants. Specifically, the court concluded that Pennsylvania’s bad faith statute does not apply to reinsurance agreements, and added that the statute was intended to protect consumers from insurers, not to protect “two sophisticated, bargaining parties from one another.” The court also dismissed the good faith and fair dealing claim against the parent companies. Finally, the court dismissed the breach of fiduciary duty and negligence claims against the parent companies finding that as a reinsurer, Gaffer is not covered by the fiduciary duties owed by an insurer to an insured. Gaffer v. Discover Reinsurance Co., Case No. 3:07-CV-00580 (M.D. Pa., Oct. 10, 2007).

COURT CONFIRMS ARBITRATION AWARD BASED UPON A FAILURE TO CARRY A BURDEN OF PROOF

November 1, 2007 by Carlton Fields

An arbitration proceeding ensued as a result of a motor vehicle accident. The arbitrator could not decide which party was at fault, and therefore held in favor of the respondent, finding that the Claimant had failed to carry her burden of proof on her affirmative claims. The losing party sought to vacate the award, contending that the arbitrator had improperly presumed her to have been at fault, in manifest disregard of law. The court disagreed, finding that an award based upon a simple failure to sustain one’s burden of proof was appropriate. Beverly v. Collier, Case No. 06-1414 (USDC E.D. Ark. Oct. 12, 2007).

UK COURT GRANTS AVOIDANCE OF REINSURANCE AGREEMENTS DUE TO MISREPRESENTATIONS IN THE PLACEMENT PROCESS

October 31, 2007 by Carlton Fields

The UK Commercial Court, Queen’s Bench Division, has granted a request to avoid several reinsurance agreements based upon misrepresentations in the placement of the treaties. The treaties were first loss facultative reinsurance agreements, and the court found that there had been material misrepresentations of the cedent’s underwriting policies. Specifically, the court found that although the placement materials had represented that the cedent insured risks subject to deductibles of from £500,000 to 1 million, the reinsured risks in actuality had deductibles of from £100,000 – 200,000. The court found that the misrepresentations were of a present fact, rather than of future intention, and were highly material to the acceptance of the risk given the conditions of the particular market. The court found that if the actual underwriting practices of the cedent had been disclosed, the reinsurer would not have agreed to the reinsurance agreements. The fact that the reinsurance was a first loss cover made the amount of the deductibles particularly important. Limit No. 2 Limited v. Axa Versicherung AG [2007] EWHC 2321 (Comm. Queen’s Bench October 17, 2007).

COURT HOLDS REQUEST FOR PRODUCTION OF ALL DOCUMENTS FILED WITH ANY REGULATORY AUTHORITIES FOR TEN YEARS OVERBROAD

October 30, 2007 by Carlton Fields

Excess Insurance Company reinsured H. S. Weavers on more than 500 reinsurance contracts, and entered into a commutation agreement with Weavers. Rochdale Insurance Company partially reinsured one of the reinsurance agreements. Excess sued Rochdale, and sought production of every document filed by Rochdale with regulatory authorities over a ten year period of time. On a motion to compel, the court held that the request was overbroad. Excess did not state a rationale for the breadth of the request. Counsel had failed to meet and confer on the discovery dispute as required by a local rule, prompting a rebuke from the court. Excess Insurance Co. v. Rochdale Insurance Co., Case No. 05-10174 (USDC S.D. N.Y. October 4, 2007). Background on this dispute may be found in a Memorandum of Law filed in opposition to the motion to compel.