This case involves a situation in which a U.S. court found that an insurance policy covered a portion of damages incurred prior to and after a policy period based upon a manifestation coverage trigger. The insured then entered into a settlement agreement, and sought coverage from its reinsurers for the amount of the settlement. The resulting reinsurance dispute was litigated in a UK court. The UK court found that even though it was apparent that the insured had acted in good faith and prudently in negotiating the settlement to minimize its loss, the reinsurance did not cover damage that occurred outside the time period of the coverage of the reinsurance agreement. This decision illustrates an important area of risk for companies which may have their insurance and reinsurance governed by different applicable law, whether the laws of different U.S. states, which may have different coverage trigger or damage allocation theories, or the laws of a U.S. state and the UK. Care should be taken in establishing reinsurance programs to attempt to avoid such a scenario. Wasa International Ins. Co. v. Lexington Ins. Co., [2007] EWHC 896 (Queen’s Bench Commercial Court April 25, 2007).
Arbitration / Court Decisions
CONNECTICUT SUPREME COURT UPHOLDS AAA ARBITRATION AWARD DESPITE VACANCY ON ARBITRATION PANEL
C.R. Klewin Northeast (“Klewin”) entered into a contract with the city of Bridgeport (“the City”) for the construction of a multipurpose sports arena. After construction was completed, a dispute arose regarding whether Klewin was entitled to additional compensation due to design changes. The dispute was submitted to an arbitration panel pursuant to the contract. Under the applicable AAA rules, the dispute would ordinarily be heard by a panel of three arbitrators. However, when one of the arbitrators resigned due to illness, the two remaining arbitrators chose to proceed with the arbitration over the City’s objection. After 37 days of hearings, the arbitration panel awarded Klewin $6,020,231, plus interest. The trial court confirmed the award.
The City raised several issues on appeal. First, the City argued that the arbitration panel lacked jurisdiction because the underlying contract was procured illegally and thus void. The Court rejected this argument, holding that the defense of contract illegality was a question for the arbitrators, at least in the first instance, because the challenge related to the entire contract rather than just its arbitration clause.
Second, the City challenged the trail court’s ruling that the City waived the defense of contract illegality though its conduct in the arbitration. In upholding this ruling, the Court explained that the City’s attempt to raise the defense on the 20th day of hearings was, in essence, “too little, too late.”
Finally, the City argued that the arbitration panel lacked jurisdiction because it had only two members. In rejecting this argument, the Court noted that in the event of a vacancy, the AAA rules authorize the remaining arbitrators to continue with the hearing “unless the parties agree otherwise.” C.R. Klewin Northeast, LLC v. City of Bridgeport, Case No. 17590 (Conn. Apr. 17, 2007).
COURT RULES ABSENT SHOWING OF PREJUDICE, REINSURERS REMAIN LIABLE TO INDEMNIFY INSUREDS DESPITE LATE NOTICE OF CLAIM
In 2002, the Kansas City Southern Railroad (“KCSR”) paid $37.5 million dollars to settle claims arising out of a fatal automobile accident. This case sub judice involved a dispute between KCSR’s captive insurer, TransFin Insurance Limited (“TransFin”), and TransFin’s reinsurers, Columbia Casualty and American Re-Insurance Company (together “the Reinsurers”), relating to coverage for this claim.
The Reinsurers claimed that they were not liable to indemnify TransFin on this claim because the underlying insured, KCSR, failed to meet the necessary conditions precedent required under their policy. The court disagreed, concluding that while KCSR failed to submit a claim in writing within the required policy period, they could take advantage of the relation-back procedure for claims made after the expiration of policies.
Having concluded that TransFin properly provided coverage on KCSR’s claim, the court addressed whether TransFin’s notice to its Reinsurers was late or otherwise inadequate and, if late, whether the Reinsurers must prove prejudice before they can successfully invoke the defense of late notice by the reinsured. The court stated that it did not need to decide whether notice was timely because even assuming it was, without demonstrating they suffered prejudice as a matter of law, the Reinsurers could not avoid coverage for late notice. Columbia Casualty v. TransFin Ins. Ltd., Case No. 2:05-CV-199 (USDC D. Vt. Apr. 27, 2007).
SECOND CIRCUIT AFFIRMS ARBITRATION AWARD FINDING NO VIOLATION OF ‘WELL-DEFINED AND DOMINANT’ PUBLIC POLICY
The Second Circuit recently addressed the standard by which a court may refuse to enforce an arbitration award on the ground that the award is contrary to public policy. In a case arising out of an employment dispute, Hope Day Nursery appealed a district court decision granting the plaintiffs’ motion to confirm two arbitration awards that (1) reinstated a discharged employee with back pay; and (2) instructed Hope Day nursery to “cease and desist from hiring and/or assigning substitute teachers to work extra hours” before first offering those hours to qualified existing employees.
The Second Circuit agreed with the district court’s finding that Hope Day Nursery’s challenge to the first arbitration award was untimely. With respect to the challenge to the second arbitration award, the court explained that “[w]hile a court may ‘refus[e] to enforce an arbitrator’s award under a collective-bargaining agreement because it is contrary to public policy,’ such a refusal ‘is limited to situations where the contract as interpreted would violate some explicit public policy that is well defined and dominant…and not from general considerations of supposed public interests.’” Since Hope Day Nursery did not point to a well defined and dominant public policy that would be violated by enforcement of the collective bargaining agreement, the Second Circuit affirmed the arbitration award. District Council 1707 v. Hope Day Nursery, Case No. 06-0325-cv (2d Cir. May 4, 2007).
Court remand matter to arbitration panel for new damage award
On November 13, 2006, with respect to an NASD arbitration, a District Court entered an order remanding an arbitration award to the panel for a new damage award, finding that the award was in manifest disregard of law, and shocking to the conscience of the court. On April 9, 2007, the Court entered an Order denying a motion for reconsideration. Apparenly upset with the passage of time with no progress, the Order provides that if the panel does not enter a new damage award within 30 days, the court will issue an Order to Show Cause why the panel should not be held in contempt. Strobel v. Morgan Stanley Dean Witter, Case No. 04-1069 (S.D. Cal.).