Six recent opinions, four from US Courts of Appeal, have considered confirmation or vacation of arbitration awards. Five of the opinions rejected claims that the arbitration awards were in manifest disregard of law. Five Star Parking v. Union Local 723, Case No. 06-2012 (3d Cir. July 24, 2007) (reversing the vacation of an arbitration award relating to a collective bargaining agreement, finding that the award interpreted a contract); Aldred v. Avis Rent-a-Car, Cased No. 06-14883 (11th Cir. July 24, 2007) (affirming confirmation of award relating to collective bargaining agreement interpreting a contract); HSM Construction Services, Inc. v. MDC Systems, Inc., Case No. 06-2584 (3d Cir. July 16, 2007) (affirming confirmation of an arbitration award, finding no manifest disregard of law and no evident partiality); Caja Nacional de Ahorro y Seguros in Liquidation v. Deutsche Ruckversicherung AG, Case No. 06-5826 (USDC S.D.N.Y. Aug. 1, 2007) (confirming award pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the federal Arbitration Act, finding no manifest disregard of law, that the Panel did not exceed its authority and that questions regarding the admissibility of evidence did not provide a basis for vacating the award); Buechner v. Mid-America Energy, Inc., Case No. 07-109 (USDC W.D.Ky. July 27, 2007). The sixth opinion vacated an award dealing with attorneys' fees on the basis that it was partially in manifest disregard of law and partially in violation of an enabling statute. Porzig v. Dresdner, Kleinwort, Benson, North America LLC, Case No. 06-1212 (2d Cir. Aug. 7, 2007).
Arbitration / Court Decisions
INSURED’S “FOLLOW-THE-FORTUNES” ARGUMENT FALLS SHORT
This breach of contract case arose out of a dispute between insurer-plaintiff National Union Fire Insurance Company of Pittsburg (“NU”) and its reinsurer-defendant, Clearwater Insurance Company (“Clearwater”). NU alleged that Clearwater breached its reinsurance agreement by failing to fully indemnify it for losses incurred from the settlement of an underlying dispute. While Clearwater paid for roughly ¼ of the $1.9 million dollars sought by NU, Clearwater claimed it was not responsible for the remaining amount since some portion of the settlement payment was to settle consequential damages claims not covered by the reinsurance certificates. In response, NU asserted the “follow-the-fortunes” doctrine and moved for summary judgment. Clearwater moved to compel additional discovery.
The Court denied NU’s motion for summary judgment, reasoning that “a genuine issue of material fact exists as to whether the settlement did indeed involve payment in some substantial amount of the consequential damages claims. . ..” The Court appear to accept that if it could be proven that a portion of the payment was for losses not covered by the reinsurance agreement, that the follow-the-fortunes doctrine would not apply to those amounts. The Court granted in part and denied in part Clearwater’s request for additional discovery. National Union Fire Ins. Co. v. Clearwater Ins. Co., Case No. 04-CV-5032 (S.D.N.Y., July 19, 2007).
UK COURT OF APPEALS AFFIRMS DECISION IN FAVOR OF BROKER
In a November 7, 2006 post to this blog, we reported on a decision of the UK Commercial Court rejecting claims against a reinsurance broker. The UK Court of Appeals has affirmed the Commercial Court’s decision, based in part upon there being inadequate evidence that the losses complained of were caused by the alleged misconduct of the broker. To reach the loss causation issue, however, the Court affirmed the holding below that the broker had a continuing duty of disclosure to the cedent after the reinsurance had been issued, which is an important point. This opinion contains an interesting discussion of the role of brokers in the insurance and reinsurance markets, especially where the same broker places “back-to-back” insurance and reinsurance coverage. The Court's approach to this kind of situation is illustrated by its statement that “[t]he role of an insurance broker is notoriously anomalous for its inherent scope for engendering conflict of interest in the otherwise relatively tidy legal world of agency.” Opinion, paragraph 60. HIH Casualty & General Insurance Limited v. JLT Risk Solutions Limited, [2007] EWCA Civ. 710 (July 12, 2007).
COURT DENIES CROSS MOTIONS FOR SUMMARY JUDGMENT IN CASE SEEKING RESCISSION OF TWO REINSURANCE FACILITIES
This dispute relates to two reinsurance contracts between Axa Versicherung (“Axa”) and three subsidiaries of American International Group (collectively, “AIG”). In 1996, Axa’s predecessor in interest, Albingia Verischerungs AG, agreed to participate in a reinsurance facility for AIG for a fourteen month period. Following that term, Algingia agreed to renew its participation for a thirteen month period commencing on December 1, 1997. Axa sought to rescind those contracts on the basis of fraud, alleging that AIG misrepresented or failed to disclose certain material facts in connection with the negotiation of those contracts. Specifically, Axa alleged that AIG misled Algingia concerning what sort of facility the contracts created, “facultative” or “facultative obligatory.” Both parties moved for summary judgment – Axa on the merits and AIG on a statute of limitations defense.
The Southern District of New York denied both motions in their entirety. With respect to AIG’s statute of limitations argument, the court recognized that Axa initiated this action after the six year statute of limitations expired, however, could not conclude that the case was time-barred because “the determination of when plaintiff reasonably could have discovered the alleged misrepresentations involves genuinely disputed issues of fact not appropriate for summary judgment.” The court concluded that those same disputed issues of fact rendered the case inappropriate for summary judgment on the merits. Axa Versicherung v. New Hampshire Ins. Co., Case No. 05-10180 (S.D.N.Y. July 23, 2007).
DISTRICT COURT AFFIRMS BANKRUPTCY COURT ORDER DENYING IMPOSITION OF CONSTRUCTIVE TRUST
This matter came before the Northern District of New York on appeal from a Bankruptcy Court Order, awarding Richard Breeden, Chapter 11 trustee (the “Trustee”) of The Bennett Funding Group, judgment on the pleadings and dismissing the Ades and Berg Groups’ (the “Ades Investors”) counterclaims for imposition of a constructive trust upon the proceeds of a reinsurance policy allegedly covering the Ades Investors’ losses. The proceeds of the reinsurance policy were to be paid to the Trustee pursuant to the terms of a settlement agreement with Sphere Drake.
In a de novo review, the Court affirmed the Bankruptcy Court’s Order, concluding that the Ades Investors’ claim failed to satisfy all four elements applicable under New York law for the imposition of a constructive trust. Specifically, the Court concluded that while three of the four elements were satisfied, the fourth element, requiring a showing that the Trustee was unjustly enriched when he retained the settlement proceeds from Sphere Drake, was not met. In re: The Bennett Funding Group, Case No. 97-70049 (N.D.N.Y. July 10, 2007).