Harper Ins. Limited v. Century Indemnity Co.

(10 Civ. 7866 (NRB); July 28, 2011) Arbitration Panel May Craft Remedy Not Requested by Either Party So Long as Remedy Is Within Issues Presented for Arbitration

Century Indemnity entered into a reinsurance treaty with a large group of London Market Reinsurers (LMRs). The treaty obligated the LMRs to indemnify Century for certain levels of liability arising out of asbestos bodily injury lawsuits. The treaty did not include a Reports and Remittances clause dictating when claims must be compensated by the LMRs but rather directed that “the liability of the Reinsurers shall follow that of the Company in every case” and that “all payments of claims … in which this reinsurance is involved shall be binding upon the Reinsurers, who shall be bound to pay or allow, as the case may be, their proportion of such payment … .” The treaty also contained a broad arbitration clause stating that the arbitrators “shall interpret the Agreement as an honorable engagement and shall make their award with a view to effecting the general purpose of the Agreement … .”

Century and the LMRs entered into arbitration with respect to certain losses. The arbitration panel issued an order that included a pre-payment provision that was not part of the treaty and had not been requested by either party. The provision obligated the LMRs to pay submitted billings even if it disputed them, with a right to dispute the billings and receive any appropriate reimbursements from Century, with interest. The LMRs subsequently filed suit seeking an order vacating the panel’s order on the grounds that the arbitrators exceeded their authority. The court denied the petition, instead affirming the arbitrators’ award.

The court ruled that the arbitrators did not exceed their authority because the issue of the payment dispute was properly before the arbitrators and arbitrators are given broad authority to craft remedies with respect to the issues presented before them, even if no party requests such remedy. The court ruled that vacatur of an award is appropriate only if the arbitral award contradicts an express and unambiguous term of the contract between the parties or if the award “so far departs from the terms of the agreement that it is not even arguably derived from the contract.” Arbitration awards will be upheld so long as the arbitrator “offers a barely colorable justification for the outcome reached.”

As the issue of payment of claims was squarely before the arbitration panel, the panel’s award, which included a prepayment requirement neither contemplated by the treaty nor requested by either party, was nonetheless upheld as appropriately within the power of the arbitrators.

IMPACT - REINSURANCE: As reinsurance disputes are frequently resolved through arbitration, this case provides useful guidance for parties involved in reinsurance arbitrations on how to craft requests for relief and consider mutually limiting the arbitrators’ authority before a final award is ordered.