SDNY Court Affirms Arbitration Award for Reinsurer Based on Claims Practices Provision, Noting Insured Failed to Offer Basis upon Which to Vacate the Award

AM. Centennial Ins. Co. v. Global Int’l Reinsurance Co, Ltd. (S.D.N.Y., July 9, 2012)

The insurer brought a petition seeking to vacate an arbitration award. From 1999 to 2008, the cedent insurer engaged in a series of acquisitions and corporate reorganizations that caused its reinsurer to seek a reduction in its reinsurance obligations. 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 the reinsurer to seek a reduction in its reinsurance obligations the cedant made certain changes to its corporate structure or operations.

The three-arbitrator panel found that the cedent had the burden to “disprove the existence of a breach and the amount of adjustment” to the reinsurer. The panel further stated that “neither the cedent, nor its ultimate parents…took a proactive role in addressing policyholders’ perceptions of the financial strength and stability” following the reorganization and acquisitions. The panel found in favor of the reinsurer.

The cedent argued that the panel exceeded its authority by awarding the reinsurer a reduction without demonstrating that the cedent’s change in practices materially increased the reinsurer’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, the cedent failed to take a proactive role.