Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

THIRD CIRCUIT AFFIRMS ENFORCEMENT OF ARBITRATION AWARD

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United Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union (“United”) brought an action in the Western District of Pennsylvania to enforce an arbitration award directing Neville Chemical Company to reinstate and make whole an employee it had improperly discharged. This appeal followed the District Court’s Orders granting United’s motion for summary judgment and ordering Neville to pay damages including back pay.

The Third Circuit held that because Neville failed to raise the argument of that the employee was physically unable to work during the arbitration, it had waived the physical limitations defense to the enforcement of the arbitration award. The Third Circuit cited its previous decision in United Food and Chemical Workers Union Local 1776 v. Excel Corp., 470 F.3d 143 (3d Cir. 2006) noting that “‘the long-established federal policy of settling disputes by arbitration would be seriously undermined if parties kept available information from the arbitrator and then attempted to use the information as a defense to compliance with an adverse award.’” The Court further noted that the argument had not been timely raised under Pennsylvania law and that the back-pay damages imposed by the District Court did not amount to a second opportunity to receive unemployment compensation. United Steel, Paper & Forestry, Rubber, Manufacturing, Energy, Allied Industrial & Service Workers International Union v. Neville Chemical Co., No. 07-3554 (3d. Cir. Oct. 30, 2008).

This post written by John Black.

COURT CONFIRMS REINSURANCE ARBITRATION AWARD, REJECTING NUMEROUS PROCEDURAL CHALLENGES

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When a dispute arose over the allocation and payment of losses under a reinsurance agreement pursuant to which Global International Reinsurance Company agreed to reinsure TIG Insurance Company, the parties took their dispute to arbitration. An arbitrator granted TIG’s motion for partial summary judgment, finding that Global had released its right to audit and dispute certain claims. The dispute arose out of transactions and claims which had been the subject of a prior arbitration and settlement agreement. The parties disagreed as to their current claim audit rights and payment obligations under the reinsurance agreement and the prior settlement agreement. The arbitrator granted partial summary judgment based upon an interpretation of the various agreements and the prior arbitration award, after four hours of oral argument but no evidentiary hearing.

Global sought the vacation of the award, contending that it had been denied a fundamentally fair hearing because the arbitrator had refused to hear evidence, disregarded the standards of summary judgment, and resolved material factual disputes without discovery or an evidentiary hearing, in violation of the standards contained in Section 10(a)(3) of the Federal Arbitration Act. The district court confirmed the award, noting: (1) that the settlement agreement gave the arbitrator the authority to resolve “any dispute” arising from or relating to the settlement agreement and other agreements; (2) that arbitrators have “great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings;” and (3) that a court has very narrow authority to vacate arbitration awards, even if it disagrees with the merits of the arbitrator’s decision, so long as there is a “barely colorable justification for the outcome reached.” The court found that the arbitrator had acted within the scope of the authority delegated by the very broad provision and within the scope of his broad authority to manage the arbitration process. This opinion illustrates the expansive authority that arbitrators have to manage and conclude arbitrations. Global Int’l. Reinsur. Co. v. TIG Insur. Co., Case No. 08-7338 (USDC S.D.N.Y. Jan. 20, 2009).

This post written by Rollie Goss.

FURTHER RULINGS IN FINITE REINSURANCE CRIMINAL ACTION

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AIG’s former vice-president of reinsurance has been sentenced in the criminal finite reinsurance prosecution to four years imprisonment, and fined $200,000. The court also has entered a Final Order of Forfeiture, in the amount of $5 million jointly and severally for all defendants. Gen Re has paid the $5 million amount in full. Perhaps more significantly, defendant Ferguson has appealed his conviction, and the government has appealed his sentence. The appeal means that the issue of the criminalization of the underlying disputed reinsurance contracting will be addressed by the Second Circuit.

This post written by Rollie Goss.

NAIC EXECUTIVE COMMITTEE REJECTS WORKING GROUP’S PROPOSALS

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On Tuesday, January 27, 2009, this author attended the NAIC Capital and Surplus Relief Working Group public hearing in Washington, D.C. The Working Group met to discuss its draft recommendations on nine insurance industry proposals offered by the ACLI designed to provide capital and surplus relief on life insurers’ December 31, 2008 statutory financial statements. One proposal offered by ACLI requested that regulators allow insurers to utilize the 2001 CSO Preferred Mortality Tables for contracts based on the 2001 CSO Mortality Table and issued prior to the January 1, 2007 effective date on which the Mortality Tables were set to become applicable. The Technical Group assigned to consider this proposal expressed concern that some companies may already be addressing the overly conservative reserves through a questionable reinsurance accounting practice. The Technical Group recommended that Insurance Commissioners consider requiring companies to demonstrate that they have not used such reinsurance accounting practices before allowing the company to utilize the new Mortality Tables. Another proposal related to collateral for reinsurance transactions. After spirited discussion among regulators, industry representatives, and consumer advocates, the Working Group formally approved each of its prior draft recommendations and forwarded its recommendations to the NAIC Plenary Body.

On Thursday, January 29, the NAIC Executive Committee held a teleconference vote on the proposals forwarded by the Capital and Surplus Relief Working Group. The Executive Committee, in a near unanimous vote, rejected the Working Group’s recommendations noting that neither the ACLI nor any insurance company provided sufficient information to justify enacting these proposals on an emergency basis.

The Executive Committee concluded that NAIC Working and Technical groups should continue to provide feedback and guidance during the current financial crisis. The Committee commented that companies should continue to work with their state regulators to maintain sufficient capital, and that the NAIC was open to considering these issues again in the future. Read the NAIC's release on the action..

This post written by John Black.

MANIFEST DISREGARD OF LAW OPINION POSSIBLY EN ROUTE TO SUPREME COURT

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Last October, the Supreme Court vacated the Ninth Circuit's opinion in Comedy Club, Inc. v. Improv West Associates, and remanded the case for further consideration in light of Hall Street Associates. In the vacated opinion, the Ninth Circuit had vacated an arbitration award, finding that the arbitrator had acted in manifest disregard of law. On remand, the Appellee filed an initial brief, the Appellant filed a responsive brief, and the Appellee filed a reply brief. The case is now fully briefed. As of this writing, oral argument had not been scheduled. We will continue to monitor this case, which may provide authoritative guidance as to whether the manifest disregard of law doctrine survived the Supreme Court's Hall Street Associates opinion.

This post written by Rollie Goss.