Reinsurance arbitration panels frequently order monetary awards that are not derived in a strict arithmetic fashion but rather reflect a balancing of the relative equities involved in the dispute based on the evidence. The question of whether such awards may be vacated on the grounds that they are too “indefinite” or the product of a “rough justice” compromise in violation of the Federal Arbitration Act was the subject of a recent Illinois federal district court ruling confirming a panel’s contact damages award.
In this dispute, the cedent wrote certain warranty contracts administered by a managing agent in the context of a 100% fronting arrangement. In the wake of huge losses, the reinsurers sought rescission of the reinsurance agreement or, alternatively, breach of contract damages due to the managing agent’s alleged maladministration of the program. Following an eight-day hearing, the panel denied the reinsurers’ rescission claim but awarded $4.82 million related to the agent’s payment of uncovered claims, unreported claims, and late reported claims; unreported premiums; and lost investment income, stating that its decision reflected “the panel’s evaluation of the relative responsibilities of the parties for the problems resulting from the Reinsurance Agreements.”
In its motion to vacate the decision, the cedent argued in federal district court that the monetary award violated Section 10(a)(4) of the Federal Arbitration Act, which provides that an award may be vacated by the court “[w]here the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” Observing that the scope of its review of the panel’s decision was “grudgingly narrow” and that “mere ambiguity” was an insufficient basis on which to vacate an award, the district court held that the monetary award was “clear, final and definite” on the issues submitted to the panel regarding the managing agent’s alleged maladministration of the warranty program. Thus, it rejected the cedent’s argument that the award was “indefinite” because it did not take into account the reinsurers’ ongoing contractual payment obligations and should be treated as an offsetting credit against monies the reinsurers allegedly owed it and not as a lump sum payable outright to the reinsurers. The award could only be vacated, according to the court, if it was not sufficiently clear and specific enough to be enforced, which was not the case here.
With regard to the cedent’s “rough justice” compromise argument, the court was not persuaded that the panel had ignored the rule of law in fashioning its award given the court’s review of the hearing record and post-hearing briefing. Even if the panel had made an “equitable” decision, the court concluded that the cedent had waived application of a “strict rule of law” standard given both parties’ reliance on, inter alia, general legal principles regarding agency, industry custom, and “business fairness” rather than strict adherence to the governing state law.
Certain Underwriters at Lloyds’ v. BCS Insurance Co., No. 01 C 1374, 2003 U.S. Dist. LEXIS 83 (N.D. Ill. Jan. 3, 2003)