New reinsurance-related and arbitration developments from Carlton Fields
The staff of Reinsurance Focus wishes all of our readers a very happy holiday season. We hope that you have a good time with your families and are able to forget all about reinsurance and arbitration for a while and enjoy the holidays.
Rollie Goss, Lynn Hawkins and our contributors
By a vote of 360-53, the House has passed a seven year extension of the Terrorism Risk Insurance Act. The enacted version mirrors the version passed by the Senate, which does not include coverage for nuclear, biological and chemical attacks or credit life insurance. Although the Bush administration favors not renewing TRIA, there have been indications that the President would sign a bill such as the one passed by the House.
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.
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.
Section 11(a) of the Federal Arbitration Act permits a district court to correct an “evident material mistake in the description of any person, thing, or property referred to in an award.” A district court “corrected” an arbitration award under the authority of that section to reflect that the party which lost the arbitration had paid substantially all of the liability prior to the entry of the award, even though it had been stipulated in the arbitration that the payment had not been made. The court of appeals reversed, finding that an award could be corrected under this section only if the arbitrator had made a mistake by “understanding wrongly” or “recognizing or identifying incorrectly.” The court held that ignorance, or lack of knowledge, because the parties did not convey a fact to the arbitrator, did not qualify as a mistake. The court of appeal also reversed a decision of the district court not to award pre-judgment interest, which was based upon federal law, holding that in a matter in which jurisdiction is based upon diversity of citizenship, questions relating to pre-judgment interest are governed by applicable state law. AIG Baker Sterling Heights, LLP v. American Multi-Cinema, Inc., No. 07-10130 (11th Cir. Nov. 28, 2007).
This post written by Rollie Goss.