In this non-insurance case, the party which lost in arbitration sought to have the award vacated under the Federal Arbitration Act on the basis that the panel had exceeded its authority. This opinion contains a good discussion of this standard for vacating an award on this basis in the Third Circuit. The standard is whether the award is “completely irrational” and “draws its essence” from the underlying agreement. “In considering the arbitrator’s interpretation of the contract, the question becomes whether “the interpretation can in any rational way be derived from the agreement, viewed in the light of its language, its context, and any other indicia of the parties’ intention.” Exxon Shipping Co. v. Exxon Seamen’s Union, 73 F.3d 1287, 1295 (3d Cir. 1996).” Finding that the motion to vacate the award was, in reality, merely a challenge to the arbitrators’ factual and legal determinations, the court denied the motion to vacate and confirmed the award. Southco, Inc. v. Reell Precision Manufacturing Corp., Case No. 08-189 (USDC E.D. Pa. May 27, 2008).

This post written by Rollie Goss.

Argonaut Insurance Company reinsured Hartford Accident and Indemnity Company under a facultative certificate which covered a $1 million general liability policy, which was subject to the terms, conditions, and limits of liability set forth in the facultative certificate. Hartford retained $250,000 under the facultative certificate, and Argonaut reinsured 50%, or $375,000, of the $750,000 above Hartford’s retention. Hartford issued three primary policies over a number of years and paid $5 million to settle products liability claims, allocating the amount equally to the three primary policies. Hartford later agreed to pay $54 million to buy back its primary policies and some excess policies it had issued. The issue with respect to the reinsurance became how the losses were allocated by year.

Argonaut sought documents to explore potential inconsistencies in allocations over the years, but Hartford contended, and the district court agreed, that a follow the fortunes clause made such an argument irrelevant, since the allocation had been made in good faith, was reasonable and was within the terms of the applicable policies. Hartford represented that it had issued over 175 policies to this insured over 30 years time, that many were totally unrelated to the single policy that Argonaut reinsured, and that it would take more than 12,000 hours to collect and conduct a preliminary review of the documents sought by Argonaut. At the same time, the court granted a motion to compel by Hartford seeking documents relating to Argonaut’s reinsurance and knowledge of the underlying claims, finding that Argonaut had put such documents at issue in one of its defenses to Hartford’s Complaint. Hartford Accident and Indemnity Co. v. Argonaut Insurance Co., Case No. 06-1813 (USDC D. Conn. Apr. 25, 2008). The court denied a motion for reconsideration, finding that requiring that Hartford provide all of the underlying insurance policies to its reinsurer would undermine the follow the fortunes doctrine.

This post written by Rollie Goss.

The Tennessee Insurance Commissioner, as liquidator for three risk retention groups, sued General Reinsurance Corp, Milliman, Price Waterhouse Coopers, Wachovia Bank and others in Tennessee state court, alleging a broad based conspiracy and fraud in a reinsurance program involving Reciprocal of America. After the case was removed to federal district court, the Judicial Panel on Multidistrict Litigation granted a motion to transfer the case to the Reciprocal of America Sales Practices Litigation MDL proceeding pending in the Western District of Tennessee. The Panel found that the actions involve questions of fact arising out of relationships and transactions substantially similar to those involved in the MDL action, and that transfer and consolidation therefore was appropriate under 28 U.S.C. section 1407. In re: Reciprocal of America Sales Practices Litigation, MDL No. 1551 (JPML June 5, 2008).

This post written by Rollie Goss.

Gerling Global Reinsurance alleged that it was “lured” to provide reinsurance through material misrepresentations and omissions and instituted arbitration against Fremont Indemnity Company. After reaching a settlement with Fremont Indemnity, Gerling sued Fremont General Corporation, Fremont Compensation Insurance Group and Louis Rampino, alleging that they had participated in a scheme to increase the premium revenue of Fremont Indemnity, seeking to recover the balance of its losses not recovered in the settlement with Fremont Indemnity. Gerling contended that the running of the statute of limitations was tolled because the defendants were alter egos of Fremont Indemnity. Both the district court and the Ninth Circuit Court of Appeals disagreed, finding that the causes of action against all of the parties accrued at the same time, and that there was no tolling of the running of the statutes of limitation on the claims against Fremont General Corporation, Fremont Compensation Insurance Group and Louis Rampino during the arbitration with Fremont Indemnity. Gerling Global Reinsurance Corporation of America v. Fremont General Corp., No. 07-55198 (USCA 9th Cir. June 24, 2008).

This post written by Rollie Goss.

On July 18, 2007, we reported on a ruling by the New York Supreme Court’s Appellate Division in a case in which it described the conduct of the insured, American Home Assurance, as “manifest manipulation,” based upon its taking inconsistent positions on the number of insured occurrences of environmental pollution in order to minimize its liability to its insured but maximize its reinsurance recovery. The result of the ruling was the complete loss of American Home’s reinsurance cover. Without opinion, the New York Court of Appeals has denied a motion for leave to appeal, apparently ending the case. Allstate Insurance Company v. American Home Assurance Co., Mo. No. 213 (NY June 3, 2008).

This post written by Rollie Goss.

A jury in state court in San Francisco, California has found, by special verdict, that a reinsured waited too long to sue its reinsurer for failure to pay claims under two facultative reinsurance certificates. The jury rejected the contention that the running of the statute of limitation was tolled due to the ongoing investigation and negotiations between the parties. Background on the dispute is found in the Complaint. Transport Insurance Company v. TIG Insurance Company, No. CGC-06-448898 (Cal. Super. Ct. June 9, 2008).

This post written by Rollie Goss.

On November 19, 2007, we reported on the denial of a motion to dismiss an action seeking to bar the arbitration of disputes under 43 reinsurance contracts. A district judge has now compelled the production of documents in five categories, finding them relevant to both the claims alleged by Midwest Employers Casualty Company (“MECC”) and the defenses of Legion Insurance Company (“Legion”). The dispute is whether the reinsurance contracts provide for coverage on a “risk attaching” basis (Legion’s contention) or a “loss occurring” basis (MECC’s contention). The court compelled Legion to produce:

• Contracts evidencing reinsurance purchased by Legion for program business on a “loss occurring” basis;


• Documents evidencing the attachment basis of the reinsurance that Legion purchased from MECC;


• Documents showing Legion’s booking of or accounting for reinsurance purchased from MECC;


• Documents showing actuarial support for Legion’s last Schedule F statutory filing relating to its projection of MECC’s ultimate liability and any subsequent projection of MECC’s ultimate liability; and


• Documents showing case reserves and reinsurance receivables by claim, program and/or year relating to Legion’s policies or accounts reinsured by MECC or that otherwise show reinsurance payments that Legion estimated or expected to receive from MECC.

Further detail regarding the dispute is set forth in the memoranda in support of and in opposition to the Motion to Compel. Midwest Employers Casualty Company v. Legion Insurance Company, Case No. 07-870 (USDC E.D. Mo. June 4, 2008).


This post written by Rollie Goss.

In an appeal of an arbitration award rendered pursuant to the rules of the National Association of Securities Dealers (“NASD”), the First Circuit has reversed the confirmation of an arbitration award on the basis that the award was in manifest disregard of law. The arbitrators had dismissed certain claims, with prejudice. The Panel initially justified its decision as being based upon its consideration of the merits of the claims, but when the losing party reminded the Panel that the merits of the claims had not been briefed, nor had the Panel received any evidence pertaining to the claims, the Panel announced that the dismissal was a discovery sanction pursuant to NASD Code Rule 10305, based upon the failure to produce documents in accordance with an Order to do so. The First Circuit found that the NASD rules required the imposition of lesser sanctions in an attempt to achieve compliance “before the ultimate sanction of dismissal is imposed. The Panel ignored this unmistakable directive.” The Court clearly was troubled by the severity of the sanction.

This opinion does not mention the Supreme Court’s decision in Hall Street Associates v. Mattel, which another panel of the First Circuit has read as eliminating the doctrine of manifest disregard of law as a basis for vacating an arbitration award. See the June 30, 2008 post discussing Ramos-Santiago v. UPS, No. 07-1024 (1st Cir. April 24, 2008), which stated in dicta that “manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the [FAA]”. This is developing into an interesting area of the law of arbitration. Kashner Davidson Securities Corp. v. Mscisz, No. 07-1231 (1st Cir. June 27, 2008).

This post written by Rollie Goss.

The New York Insurance Department, as Liquidator of Nassau Insurance Company, pursued Jeanne Diloreto for 20 years to recover what it contended were assets diverted from Nassau, recovering a judgment in state court that it attempt to execute upon. Superintendent DiNallo ended up filing an involuntary bankruptcy petition against Ms. Diloreto, which was dismissed, in part based upon procedural infirmities. Diloreto sought damages for a bad faith filing, and established to the satisfaction of the bankruptcy court that the motivation for filing the petition was related to a potential recovery in an ancillary malpractice action that Diloreto had filed against her former law firm. The bankruptcy court judge determined that while the filing by Superintendent DiNallo had not been in bad faith, Diloreto nevertheless was entitled to a judgment against Superintendent DiNallo in his capacity as Liquidator in an amount exceeding $70,000 for attorney’s fees and costs, which it Ordered could not be offset against the Liquidator’s state court judgment against Diloreto. This is a procedurally tortured case, centering on a very long running dispute, which included Diloreto purchasing property in Florida shortly after the state court judgment was entered, apparently in the hope of shielding assets under the Florida homestead provision. In re Diloreto, Bank. No. 07-15413 (US Bank. Ct. E.D. Pa. June 19, 2008).

This post written by Rollie Goss.

Plaintiff sued in state court, alleging that he and his company were “blacklisted” from doing business on the Commodities Futures Exchange due to e-mails circulated by the defendant, which is a large clearing firm on the New York Mercantile Exchange (“NYMEX”). After the case was removed, it was stayed pending arbitration before the NYMEX. Plaintiff then filed an arbitration demand before the National Futures Association, contending that arbitration before the NYMEX could not be impartial due to the defendant’s “considerable power and influence” within NYMEX. The district court found that potential bias did not rise to the standard of the fraud, duress or unconscionability required to disregard an arbitration agreement. The court directed plaintiff to withdraw the arbitration demand to the National Futures Association and proceed, if at all, before the NYMEX. Carboni v. Lake, Case No. 06-15488 (USDC S.D.N.Y. June 20, 2008).

This post written by Rollie Goss.

Prior to 1995, Fencourt Reinsurance Company was a wholly owned subsidiary of ITT Corp., and provided reinsurance to Century Indemnity Company, which insured ITT. Fencourt alleged that ITT promised to hold it harmless for any net losses resulting from the reinsurance arrangement, but did not produce any written agreement to that effect. In 1995, ITT reorganized, splitting into three unaffiliated public companies. This split was accomplished through a Distribution Agreement (“DA”), which Fencourt did not sign, and which contained a broad arbitration provision. Century suffered asbestos-related losses, and demanded $85.5 million from Fencourt under their reinsurance agreement. Fencourt sought indemnification from what it alleged was the successor to the indemnification promisor. Century and Fencourt commenced arbitration of their dispute, and Fencourt and the former ITT-related entities commenced a separate arbitration. Fencourt sued ITT to enforce the indemnification promise.

ITT contended that the arbitration provision in the DA covered the dispute, even though Fencourt was not a signatory to that agreement. The district court agreed with ITT and stayed the case pending the result of the already commenced Fencourt-ITT arbitration. There were three bases for the ruling: (1) the DA plainly covered the dispute, and as a wholly owned subsidiary of a party to the DA, Fencourt was bound to arbitrate; (2) Fencourt was equitably estopped from asserting that its lack of signature precluded arbitration since despite its status as a non-party to the DA, it nevertheless took advantage of certain of its provisions; and (3) Fencourt was an intended third-party beneficiary of the DA. This opinion contains a good discussion of these various theories. Fencourt Reinsurance Company, Ltd. V. ITT Industries, Inc., Case No. 06-4786 (USDC E.D. Pa. June 20, 2008).

This post written by Rollie Goss.

In an April 28, 2008 Special Focus posting and related article, we raised the question as to whether the manifest disregard of law doctrine would survive the Supreme Court’s decision in Hall Street Associates v. Mattel. This issue came up in a recent district court opinion. ALS & Associates sought the vacation of an arbitration award on three bases: (1) the arbitrator’s failure to postpone the proceedings; (2) the arbitrator’s evident partiality; and (3) the arbitrator’s manifest disregard of law. The district court confirmed the award. The court found that there was no evidence that the failure to postpone the proceedings to allow ALS to pursue documents from a third party deprived it of a fair hearing. The court noted that proceedings to enforce a subpoena to obtain 12 documents had been ongoing for two years, with two trips to the First Circuit, and that there was no showing that the documents were critical to ALS’s case. The court also rejected the contention that the arbitrator's very attenuated "connection" with one of the law firms resulted in any appearance of impropriety, much less evident partiality.

The interesting part of this opinion is the holding that the First Circuit has ruled that the manifest disregard of law doctrine is not a valid basis for vacating or modifying an arbitration award after Hall Street Associates. In so ruling, the district court relied upon the First Circuit’s decision in Ramos-Santiago v. UPS, No. 07-1024 (1st Cir. April 24, 2008), which stated that “manifest disregard of the law is not a valid ground for vacating or modifying an arbitral award in cases brought under the [FAA]”. That statement in Ramos-Santiago, however, is dicta, since the Court stated later in the footnote in which the statement appears that it was nevertheless not reaching that issue in deciding that case. However, in UMass Memorial Medical Center, Inc. v. United Food and Commercial Worker’s Union, No. 07-2527 (1st Cir. May 15, 2008), the First Circuit stated that courts still retain “inherent powers outside” the FAA to vacate arbitral awards, including situations in which the arbitrator acts in disregard of law. It seems that there is some dissention in the First Circuit on this issue. Stay tuned for further developments. ALS & Associates, Inc. v. AGM Marine Constructors, Inc., Case No. 06-10088 (USDC D. Mass. June 2, 2008).

This post written by Rollie Goss.

A trial court had no basis to vacate arbitration awards, the New Jersey Appellate Division has held. An insurer, Selective, sued a bus company, Coach, in a subrogation action, but subsequently offered to pursue the dispute in an arbitral forum. The attorney for Coach agreed and the litigation was voluntarily dismissed on stipulation of the parties specifying the particular forum to be used. Shortly before the stipulation was filed, Coach’s attorney indicated to Selective’s attorney that it was self-insured, and that Sedgwick Claims Management served as its third-party administrator of claims made against it. The arbitration was later filed, and Sedgwick was served by Selective in accordance with the rules of the arbitral forum. Neither Coach nor Sedgwick appeared at the arbitration hearing, and the arbitrator issued two awards in Selective’s favor. Selective then sought the awards’ confirmation. The trial court initially confirmed the awards, and entered a default judgment against Coach for failure to answer. However, the trial court later vacated both the default judgment and the arbitration awards, concluding that there had not been due process notice of the arbitration to Coach, which the trial court determined had not designated Sedgwick as its “local representative” to handle the claim in accordance with the arbitral rules.

On appeal, Selective argued that the trial court erred because it had served Coach in accordance with the rules. Coach countered that the awards were properly vacated for lack of notice of the arbitration, that it provided a timely defense to the awards after receiving actual notice, and that it was never a proper party to any subrogation action. The appellate court first determined that the awards should be enforced. The stipulation of voluntary dismissal expressly acknowledged that the parties would arbitrate in the forum designated. Moreover, it was undisputed that Coach’s counsel furnished the name and address of a Sedgwick adjuster as the person to whom Selective should direct any questions or inquiries. Adequate notice of the arbitration was thus given to Coach. Next, the court determined that the default judgment was properly vacated because, although Coach had failed to answer in a timely fashion, it nonetheless moved to vacate the entry of default two days after the entry of judgment. However, Coach was estopped to present any defense that it was not a proper party to a subrogation action, since the statute it relied on, N.J.S.A. 39:6A-9.1, was not a defense to an arbitration award and, in any event, applied to self-insureds, which Coach had admitted it was. Selective Insurance Co. v. Coach Leasing, Inc., Case No. A-4007-06T2 (N.J. App. Div. June 16, 2008).

This post written by Brian Perryman.

In an opinion that runs just over one page long, the New Jersey Supreme Court has affirmed the decision of the Appellate Division that upheld a provision of an arbitration agreement entered into by two “sophisticated business parties” which foreclosed appellate court review of the decision of an arbitrator, but finding the provision invalid to the extent that it foreclosed the right to initial judicial review, which would have deprived a court of the ability to vacate the award if it violated public policy. The contractual provision stated that the arbitrator’s decision would be “final, binding and conclusive” and “not subject to an appeal to any authority in any forum.” “Additionally, the parties forswore any legal action other than one to confirm or enforce (but not to vacate) the arbitration award.” After an award was entered, a trial court judge confirmed the award, and an appeal was filed. A motion to dismiss the appeal was filed, on the basis that the parties had expressly waived any right to appeal. The Appellate Division panel denied the motion to dismiss, and entered an opinion examining the award and upholding its validity, finding the absence of any grounds under the New Jersey Arbitration Act for vacating an award on the basis of public policy. In a single sentence, the Court mentioned that the “rare circumstances” that might justify an appellate court in vacating an arbitration award on public policy grounds might include bias or misconduct of the trial judge or unconscionability in the formation of the contract, and that none of these bases were present. The Court affirmed “substantially for the reasons expressed in” Appellate Division’s opinion. Van Duren v. Rzasa-Ormes, No. A-52-07 (N.J. June 19, 2008).

This post written by Rollie Goss.

In an August 28, 2007 post, we reported on the decision of the UK Commercial Court granting a permanent injunction against an insurer seeking to challenge a UK arbitration award, which was governed by New York law, in US courts. The UK Court of Appeals has denied an appeal, affirming that decision, in a situation in which: (1) the contract was a Bermuda insurance form; (2) the contract provided that it was governed by New York substantive law; and (3) the contract provided that any arbitration would occur in London, subject to UK arbitration law. The decision turned on the interpretation of the insurance contract, with the Court of Appeals agreeing with the analysis and conclusion of the Commercial Court judge. The Court of Appeal found that disputes as to the confirmation or vacation of an award had to be brought in the UK courts, and that a permanent injunction barring the insurer from challenging the award in US courts was appropriate. C and D [2007] EWCA Civ. 1282 (Dec. 5, 2007).

This post written by Rollie Goss.