2009 JUDICIAL DECISIONS IMPACT ON REINSURANCE AND THE ARBITRAL PROCESS

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1 ARIAS U.S. Fall Conference November 12, 2009 Stimulating Debate: Tough Talk and Tough Economic Times 2009 JUDICIAL DECISIONS IMPACT ON REINSURANCE AND THE ARBITRAL PROCESS Alexandra D. Furth Liberty Mutual Insurance Company. Jennifer R. Devery Crowell & Moring LLP 1

2 OVERVIEW The Power of the Arbitration Panel and Courts Ability to Review Arbitral Decisions The Court s Role in Addressing Procedural Issues When a Party-appointed Arbitrator Drops Out of Arbitral Process Mid-arbitration The Functus Officio Doctrine (i.e. when a panel s authority ends) The Follow-the-Settlements Doctrine 2

3 The Power of the Arbitration Panel and Courts Ability to Review Arbitral Decisions ReliaStar Life Ins. Co. v. EMC National Life Co. TIG Ins. Co. v. Global Int l Reinsurance Co., Ltd. Global Reinsurance Corp. of Am. v. Argonaut Ins. Co. PMA Capital v. Platinum Underwriters 3

4 The Federal Arbitration Act 10(a) Gives federal courts authority to vacate arbitral awards when arbitrators are guilty of misconduct in refusing to hear pertinent and material evidence; or when arbitrators exercise powers beyond what was contemplated by the parties to the arbitration agreement 4

5 ReliaStar Life Ins. Co. v. EMC National Life Co. 564 F.3d 81 (2d Cir. 2009) Arbitration between two co-insurers, ReliaStar Life Insurance Company of New York and EMC National Life Company as successor to National Travelers Life Company Panel awarded ReliaStar damages for National Travelers breach of contract and awarded ReliaStar: Over $3 million in attorney s fees and arbitrator s fees; and Over $690,000 in costs, plus interest Based on a finding that National Travelers had not conducted the arbitration in good faith ReliaStar petitioned court to affirm award; National Travelers counter-petitioned to vacate the sanctions 5

6 ReliaStar Life Ins. Co. v. EMC National Life Co. District Court agreed with National Travelers that the panel had exceeded its authority in awarding fees and costs and vacated that portion of the final award Second Circuit reversed and rejected National Travelers argument 6

7 ReliaStar Life Ins. Co. v. EMC National Life Co. Significant Holdings: Broad arbitration clause (such as the one at issue) conferred comprehensive arbitral authority, including inherent authority to sanction a party that acted in bad faith Language in the agreement requiring each party to pay its own attorney s fees and arbitrator s fees did not limit scope of inherent authority Court reasoned that such a clause applied in the expected context of good faith dealings; nothing in the clause signaled the parties intent to limit the arbitrators inherent authority to sanction bad faith participation in the arbitration 7

8 ReliaStar Life Ins. Co. v. EMC National Life Co. Judge Pooler s Dissent: Contract expressly divested the arbitral panel of authority to award attorney s fees Panel was precluded from making such an award Majority made little effort to define scope and limits of what constituted inherent authority Concept itself contradicts well-accepted principle that an arbitrator s authority is circumscribed by the agreement of the parties 8

9 TIG Ins. Co. v. Global Int l Reinsurance Co., Ltd. F. Supp. 2d, 2009 WL (S.D.N.Y. Aug. 7, 2009) TIG and Global entered into settlement agreement that provided that arbitrator of any future proceeding shall be relieved of all judicial formality and shall not be bound by the strict rules of law After an audit, Global demanded arbitration against TIG alleging that TIG had engaged in bad faith and fraudulently concealed its actions in order to induce Global to enter into settlement 9

10 TIG Ins. Co. v. Global Int l Reinsurance Co., Ltd. TIG moved for summary judgment on Global s bad faith and fraud claims; parties submitted briefs, exhibits and declarations for the arbitrator s consideration Arbitrator held oral argument, granted TIG s motion and dismissed Global s claims Global petitioned U.S. District Court for the Southern District of New York to vacate the arbitrator s award Arbitrator ignored relevant evidence Improperly resolved factual issues without the benefit of a fully developed record, discovery or witness testimony 10

11 TIG Ins. Co. v. Global Int l Reinsurance Co., Ltd. The Court Noted: Section 10(a)(3) of the Federal Arbitration Act allows vacatur of an arbitration award only where the arbitrators were guilty of misconduct... in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced. 11

12 TIG Ins. Co. v. Global Int l Reinsurance Co., Ltd. Significant Holdings: Arbitrator did not exceed authority when he ruled on TIG s motion for summary judgment Although arbitrators must afford parties an adequate opportunity to present evidence and argument, arbitrators are not bound to abide by the Federal Rules of Civil Procedure or the Federal Rules of Evidence Arbitrators have great latitude to determine the procedures governing their proceedings and to restrict or control evidentiary proceedings, and thus may proceed with only a summary hearing and with restricted inquiry into factual issues. Court rejected Global s contention that the arbitrator ignored relevant evidence at summary judgment 12

13 Global Reinsurance Corp. of Am. v. Argonaut Ins. Co. 634 F. Supp. 2d 342 (S.D.N.Y. 2009) Global retroceded claims to Argonaut Argonaut disputed claims on the basis that: (1) Global failed to give notice of the claims; (2) The contingent liabilities released by virtue of a commutation were not claims under the treaties. Panel rejected both arguments, granted Global all relief requested Argonaut petitioned U.S. District Court for the Southern District of New York to vacate portion of award relating to the commutations Argued that panel manifestly disregarded the law 13

14 Global Reinsurance Corp. of Am. v. Argonaut Ins. Co. The Court Cited: Section 9 of the Federal Arbitration Act Hall Street Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008) Sections 10 and 11 are exclusive grounds for review under Federal Arbitration Act; manifest disregard may have been short hand for 10(a)(3) or 10(a)(4) 14

15 Global Reinsurance Corp. of Am. v. Argonaut Ins. Co. Second Circuit continues to recognize the manifest disregard doctrine and the Federal Arbitration Act itself, as a mechanism to enforce parties agreements to arbitrate rather than as judicial review of the arbitrators decision. (quoting Stolt-Nielsen SA v. AnimalFeeds Int'l Corp., 548 F.3d 85, 95 (2d Cir. 2008)) Under Stolt-Nielsen, party seeking to vacate an arbitration award bears a heavy burden and a court should enforce an award as long as there is a barely colorable justification for the outcome reached 15

16 Global Reinsurance Corp. of Am. v. Argonaut Ins. Co. Significant Holdings: Arbitration panel was given substantial freedom to interpret treaties and offered a colorable justification for its interpretation based on industry practices Court refused to conclude that the panel manifestly disregarded the law or ignored the contract wording when making its decision 16

17 PMA Capital Ins. Co. v. Platinum Underwriters Bermuda F. Supp. 2d, 2009 WL (E.D. Pa. September 17, 2009) PMA and St. Paul Re entered into Contract PMA and Platinum entered into Contract Experience Account Deficit Carry-Forward Clause Platinum argued that it was entitled to carry forward the St. Paul Re deficits from the Contract to offset any funds due PMA under the Contract Parties arbitrated and Panel ordered PMA to pay Platinum $6 million within 30 days of the award and upon such payment all references to the deficit carry-forward would be removed from the 2003 Agreement PMA petitioned to vacate the award and Platinum counter-petitioned to affirm the award 17

18 PMA Capital v. Platinum Underwriters The Court Reasoned That: The Court is allowed to vacate the award if the arbitrators exceeded their authority i.e. only if... the form of the Panel s award cannot rationally be derived from the contract or from the parties submissions to the arbitrators or the terms of the award are completely irrational An arbitration award based on the interpretation of a contract is irrational if the award does not draw its essence therefrom and... is in manifest disregard thereof The presence of an Honorable Engagement Clause allowed the arbitrators to abstain from following the strict rules of law but even such broad authority has limits No court has ever found that the Honorable Engagement Clause gives arbitrators authority to re-write the contract they are charged with interpreting 18

19 PMA Capital v. Platinum Underwriters Significant Holdings: The Arbitrators acted irrationally and in excess of their authority under the contract Unreasoned award gave no insight into the Arbitrators rationale According to the Court: the Arbitrators evidently found the Deficit Carry-Forward clause to be more trouble than it was worth and simply eliminated it from the agreement Panel sought to balance one irrational decision (elimination of the Deficit Carry-Forward clause) with another (the award to Platinum of a large amount of money to which it was not contractually entitled) 19

20 Impact on Arbitrations in 2010? 20

21 Replacing An Arbitrator WellPoint, Inc. v. John Hancock Life Ins. Co. Ins. Co. of North America v. Public Service Mut. Ins. Co. 21

22 WellPoint, Inc. v. John Hancock Life Ins. Co. 576 F.3d 643 (7th Cir. 2009) Arbitration between WellPoint Health Networks and its affiliated companies and John Hancock Life Insurance Company Arbitration agreement specified: [e]ach of the parties agrees to appoint one of the arbitrators, third arbitrator to be selected by AAA if the parties could not agree AAA appointed umpire Mid-arbitration, WellPoint substituted counsel and its party arbitrator resigned (at WellPoint s request) WellPoint proposed two replacement arbitrators, but Hancock objected At Hancock s party arbitrator s suggestion, WellPoint selected replacement from among options proposed by panel Hancock objected again to withdrawal, but agreed to proceed 22

23 WellPoint, Inc. v. John Hancock Life Ins. Co. New panel arbitrated and returned award (largely) unfavorable to Hancock WellPoint sought confirmation in the district court Hancock filed petition in district court requesting vacatur Hancock argued: Panel was not selected in accordance with arbitration agreement Arbitration must begin anew Panel s final award was beyond its powers and must be vacated 23

24 WellPoint, Inc. v. John Hancock Life Ins. Co. Significant Holdings: Arbitration does not begin anew Section 5 of the Federal Arbitration Act specifically addresses the midstream loss of an arbitrator and provides that when a vacancy occurs, and the arbitration agreement is silent as to how vacancy should be filled, then court shall designate and appoint an arbitrator upon the application of either party 5 specifically provides district court authority to appoint new arbitrator Hancock should have timely availed itself of 5 and requested court intervention at time of replacement Hancock forfeited challenge to panel composition by failing to invoke 5; participation in substitution process estopped it from complaining 24

25 Ins. Co. of North America v. Public Service Mut. Ins. Co. No. 08-CV-7003, 2009 WL (S.D.N.Y. June 29, 2009) INA s Party-appointed arbitrator resigned from three-person panel midarbitration, after learning he had illness that required immediate and intensive treatment Arbitration agreement silent as to appointment of replacement arbitrators Parties disputed whether arbitration should continue with replacement arbitrator or must start anew Parties brought dispute to district court for resolution At November 2008 hearing, resigning arbitrator had recovered enough to actively solicit other engagements, but court not made aware of his recovery Court ruled that the arbitration should not continue but rather start over from scratch PSMI moved for reconsideration after discovering that resigning arbitrator had been available as an arbitrator at the time of the ruling 25

26 INA v. Public Service Mut. Ins. Co. Significant Holdings: Second Circuit s decision in Marine Products premised on the permanent unavailability of an arbitral panelist Given resigning arbitrator s recovery and availability to arbitrate, general rule of Marine Products did not apply Court could have reappointed resigning arbitrator to panel pursuant to Section 5 of FAA had it known he had recovered Court reappointed him to panel subject to certain conditions; ordered parties to continue arbitration pending as of date of his withdrawal 26

27 Impact on Arbitrations in 2010? 27

28 The Functus Officio Doctrine Bosack v. Soward 28

29 Functus Officio Doctrine Under certain circumstances, when duties and functions of a legal officer or official body s commission have been fully accomplished, officer or body has no further authority or legal competence Doctrine forbids arbitrator to re-determine issue that he has already decided 29

30 Bosack v. Soward 573 F.3d 891 (9th Cir. 2009) Panel entered five interim awards finding Bosack and Lerner liable for millions of dollars in actual and punitive damages Entered Final Award confirming interim awards On appeal, Bosack and Lerner argued that interim awards 4 and 5 should be vacated because panel had redetermined the merits of issues already decided in interim award 3 in violation the doctrine of functus officio 30

31 Bosack v. Soward Significant Holdings: Doctrine could apply to interim arbitral award if: (1) the interim award states that it is final; and (2) arbitrator(s) intend the award to be final Court recognized functus officio could apply to interim arbitral awards, and applied to interim award 3 because the panel specifically designated award 3 as final and immediately enforceable Ninth Circuit found no violation of doctrine based on the facts of the case i.e. panel had not re-determined the merits of the issues addressed in interim award 3 31

32 Impact on Arbitrations in 2010? 32

33 The Follow-the-Settlements Doctrine Lexington Ins. Co. v. Wasa Int l Ins. Co 33

34 Lexington Ins. Co. v. Wasa Int l Ins. Co. Lexington Insurance Company insured Alcoa All risks difference in conditions property damage insurance policy covering period July 1, 1977 to July 1, 1980 Alcoa initiated proceedings against Lexington and its other insurers in 1992 in Washington state court Sought determination of coverage under policies with respect to environmental contamination at multiple sites Washington Supreme Court applied Pennsylvania law Held that Lexington was liable for full cleanup costs as long as some damage occurred at the site during the period that Lexington was on the risk (1977 through 1980) Lexington liable for in excess of $180M 34

35 Lexington Ins. Co. v. Wasa Int l Ins. Co. Lexington settled with Alcoa for approximately $103 million and sought coverage from reinsurers Wasa and AGF issued facultative certificates for the exact coverage period specified in Lexington policy issued to Alcoa Facultative reinsurance purported to be on the same gross rate, terms and conditions as the policy insuring Alcoa Facultative reinsurance was back-to-back with the direct insurance Full reinsurance clause Reinsurers sought judicial declaration in English courts that they were not obligated to indemnify Lexington Argued that reinsurance only provided coverage to Lexington with regard to losses arising during the three-year period of reinsurance coverage, not to losses arising before or after that period 35

36 Lexington Ins. Co. v. Wasa Int l Ins. Co. Significant Holdings: Reinsurance contract is separate contract General presumption that facultative reinsurance to be construed consistent and back-to-back with the insurance contract trumped by difference in applicable law Ceded policy was governed by American law, reinsurance contract was governed by English law Rejecting notion that reinsurers could be liable for damage that occurred before or after the policy period as inconsistent with English law, notwithstanding holding by Washington court against ceding company Parties could not have intended or known at time of contracting that Pennsylvania law would apply 36

37 Impact on Arbitrations in 2010? 37

38 QUESTIONS? Alexandra D. Furth Liberty Mutual Insurance Company. Jennifer R. Devery Crowell & Moring LLP 38