New York Federal Court Affirms Reinsurer’s Arbitration Award Based on Claims Practices Provision, Rules Cedent Established No Basis for Vacating Award

AM. CENTENNIAL INS. CO. v. GLOBAL INT’L REINSURANCE CO., LTD. (12 Civ. 1400, July 9, 2012)

In this case, the American Centennial Insurance Company (ACIC), cedent, petitioned to the United States District Court for the Southern District of New York to vacate an arbitration award issued in favor of its reinsurer, Global International Reinsurance Company, Limited (Global). The court affirmed the arbitration award.

From 1999 to 2008, ACIC engaged in a series of acquisitions and corporate reorganizations that caused Global to seek a reduction in its reinsurance obligations to ACIC. The parties’ reinsurance agreement contained an arbitration provision which included an honorable engagement clause. This clause required arbitrators to look beyond the literal interpretation of the agreement when deciding the award, and to further state the reasons for providing any award.

The agreement also contained a change in administrative and claims practices clause, which permitted Global to seek a reduction in its reinsurance obligations to ACIC after ACIC made certain changes to its corporate structure or operations. That claims practices provision was the source of a series of three arbitration sessions, the third of which was at issue in this case.

In the third arbitration session, the threearbitrator panel found that ACIC had the burden to “disprove the existence of a breach and the amount of adjustment” to Global. The panel further stated that “neither ACIC, nor its ultimate parents … took a proactive role in addressing policyholders’ perceptions of the financial strength and stability of ACIC” following the reorganization and acquisitions.

The panel determined that Global was entitled to an award, as there was a material increase in Global’s liability from what it would have been before the reorganization and acquisitions of ACIC. ACIC filed a petition with the SDNY court to vacate the final award of the panel. First, ACIC argued that the panel exceeded its authority by awarding Global a reduction without demonstrating that ACIC’s change in practices materially increased Global’s liabilities from what they would have been. The court stated that the panel did not exceed its authority, as it reviewed the findings of prior panels, quoted relevant portions of the agreement, recited the facts, and then stated that, based upon this evidence, ACIC failed to take a proactive role. This failure and absence of direct communication to policyholders was the basis for the award.

For similar reasons, the court also rejected ACIC’s arguments that the panel exceeded its jurisdiction and authority by awarding Global 3 percent interest and “failing to provide reasons” for its decision. The court stated that the absence of direct communications to stakeholders was the basis for Global’s award. Additionally, the court noted: “The Phair Panel’s decision in this case, though not as fulsome or elucidated as ACIC would like, ‘was nevertheless adequate to satisfy the terms of the agreement.’”

ACIC also argued that the panel “manifestly disregarded” the “final and binding effect” of the awards issued by the earlier panels. The court stated that ACIC failed to demonstrate that the panel “intentionally defied a clearly governing legal principle.”

The court also rejected ACIC’s argument that the panel “manifestly disregarded the terms of the agreement by ‘ignoring the clear meaning of the material increase in liabilities term in the claims practices provision.’” Because the panel received a pre-hearing briefing from both parties and explained its findings in light of that evidence, the court determined that the panel did not “intentionally ignore an express and unambiguous term of the agreement.” Further, “[e]ven where arbitrators do not fully recount the basis for their decision, the award will be upheld if the court ‘can discern any valid ground for it.’”

The court determined that ACIC failed to offer the court a basis upon which to vacate the award of the arbitration panel, and therefore granted Global’s cross-petition to confirm the arbitration award.

IMPACT – REINSURANCE: This case emphasizes the strong deference and presumption in favor of enforcing arbitration awards. An award will be enforced unless the arbitrators “exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made.”