Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

SPECIAL FOCUS: manifest disregard of law

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The principal basis for seeking vacation of an arbitration award, other than the grounds contained in the Federal Arbitration Act (“FAA”) (9 U.S.C. section 10), is that the award was made in manifest disregard of law. Five of the United States Circuit Courts of Appeal have issued opinions dealing with this principle in recent months, with three of the opinions being issued in a ten day span during early August. All of these opinions hold that vacating an arbitration award on this basis is an extraordinary occurrence.

  • The Eleventh Circuit issued a very strong statement as to the finality of arbitration awards, holding that to prove manifest disregard of law, one must submit clear evidence that an arbitrator was conscious of the law and deliberately disregarded it. B. L. Harbert Internatiuonal, LLC v. Hercules Steel Co., Case No. 05-11153 (11th Cir. Feb. 29, 2006). The Court strongly cautioned the bar against appealing arbitration awards on the basis that the result was unacceptable.
  • The Seventh Circuit held that manifest disregard of the law is limited to situations in which arbitrators “direct the parties to violate the law ….” Wise v. Wachovia Securities, Case No. 05-2640 (7th Cir. June 7, 2006). The Seventh Circuit concluded that due to the extraordinarily narrow grounds for vacating an arbitration award, the FAA really does not provide for the “judicial review” of arbitration awards.
  • The D.C. Circuit held that the manifest disregard of law standard requires proof that the arbitration panel ignored well defined, explicit law that was clarly applicable, emphasizing that decisions based upon debatable points of law and disputed issues of fact did not meet this standard. Kurke v. Oscar Gruss and Son, Inc., Case No. 05-7018 (D.C. Cir. July 18, 2006).
  • The Ninth Circuit recently held that a decision on choice of law did not meet the manifest disregard of law standard since it was not “completely irrational.” Parsons v. Polen, 2006 WL 1082820, Case No. 04-35654 (9th Cir. April 25, 2006) (unreported opinion).
  • In the only opinion that vacated an arbitration award, the Fourth Circuit vacated an arbitration award, where an arbitrator implied a one year statute of limitation into an agreement that was silent as to the time for making a claim, and the law of the applicable state provided for either a three or a six year limitation period. Patten v. Signator Insurance Agency, Inc., Case No. 05-1148 (4th Cir. March 13, 2006).

These opinions demonstrate two principles of interest: (1) it is very difficult to convince a Court to vacate an arbitration award under the FAA; and (2) courts are becoming increasingly annoyed with what they view as frivolous motions to vacate awards under the FAA. The mere fact that five of the federal Circuit Courts of Appeal have addressed this issue recently illustrates the importance that the Courts attach to this issue.

The Seventh Circuit was correct in stating that the FAA simply does not provide for what is considered to be “judicial review” in a litigation context. Awards simply will not be vacated based upon alternative interpretations of evidence, sufficiency of evidence, or issues of law that are fairly debatable. Even if one can anticipate that an adverse award is likely, it is very difficult to establish a record that will support vacating an award under the FAA. Finally, if your arbitration occurs in the Eleventh Circuit, it is clear that motions to vacate awards and appeals of the denial of motions to vacate awards may be met with the imposition of sanctions unless there is a clearly arguable basis under the FAA to vacate the award.

Court of Appeal affirms summary judgment in favor of Lloyd's against Name

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The United States Court of Appeals for the District of Columbia Circuit has affirmed a summary judgment in favor of the Society of Lloyd's, enforcing an English judgment against a Lloyd's Name who refused to sign on with and pay reinsurance premium to Equitas. Society of Lloyd's v. Siemon-Netto, Case no. 04-7214 (D.C. Cir. August 8, 2006). At oral argument, the Names made it clear that “the underlying basis of their defense is their belief that the English courts have a 'bias and prejudice in favor of Lloyd's under circumstances which make it impossible for a Name to win.'” Under the Uniform Foreign Money Judgments Recognition Act, a foreign judgment may not be enforced if it was “rendered under a system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law.” The Names did not go so far as to seek the application of this principle, but the Court noted that if they had attempted to do so, they would have failed. The only evidence of “bias and prejudice” was that other Names who had advanced the same position as Appellants had lost their cases, and the mere fact that they had lost did not establish improper partiality. Indeed, the Court noted that “the fact that Names have lost similar (albeit not identical) cases in eight United States Courts of Appeals … would require us to reach the same conclusion regarding American courts.” With that closing statement, the Court affirmed the District Court's ruling. Carlton Fields represented the Society of Lloyd's in this case.

Court of Appeal affirms summary judgment in favor of Lloyd’s against Name

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The United States Court of Appeals for the District of Columbia Circuit has affirmed a summary judgment in favor of the Society of Lloyd's, enforcing an English judgment against a Lloyd's Name who refused to sign on with and pay reinsurance premium to Equitas. Society of Lloyd's v. Siemon-Netto, Case no. 04-7214 (D.C. Cir. August 8, 2006). At oral argument, the Names made it clear that “the underlying basis of their defense is their belief that the English courts have a 'bias and prejudice in favor of Lloyd's under circumstances which make it impossible for a Name to win.'” Under the Uniform Foreign Money Judgments Recognition Act, a foreign judgment may not be enforced if it was “rendered under a system that does not provide impartial tribunals or procedures compatible with the requirements of due process of law.” The Names did not go so far as to seek the application of this principle, but the Court noted that if they had attempted to do so, they would have failed. The only evidence of “bias and prejudice” was that other Names who had advanced the same position as Appellants had lost their cases, and the mere fact that they had lost did not establish improper partiality. Indeed, the Court noted that “the fact that Names have lost similar (albeit not identical) cases in eight United States Courts of Appeals … would require us to reach the same conclusion regarding American courts.” With that closing statement, the Court affirmed the District Court's ruling. Carlton Fields represented the Society of Lloyd's in this case.

Court applies the follow the settlements doctrine to business interruption claim

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The follow the settlements doctrine has been applied to business interruption and property damage claims filed by the owner of Universal Studios theme park in Florida, arising out of Hurricane Floyd. The Court granted summary judgment to the reinsured, finding that the reinsurer had not proven that the claims were paid in bad faith or that the claims were not reasonably within the terms of the underlying policy. Houston Casualty Co. v. Lexington Insurance Co., Case No. 05-1804 (USDC SD Tex. June 15, 2006). Two facts were of particular interest: (1) the hurricane changed course, and did not actually hit the park, making actual physical damage attributable to the storm fairly minimal; and (2) although the park was only closed for a single day, the business interruption claim extended over several more days.

Connecticut Insurance Department publishes notice of intention to revise reinsurance regulations

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The Connecticut Insurance Department has published notice of its intention to amend its current regulations concerning credit for reinsurance to delete the provision that relates to the disposition of assets of a single beneficiary trust on the insolvency of the reinsurer/grantor. Comments will be received prior through September 22, 2006.