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Practice Note:
Sanctioning Bad Faith

by ~ Alexander G. Henlin (Web Site)

ReliaStar Life v. EMC National: Sanctioning Bad Faith in Reinsurance Arbitrations

It is no secret that reinsurance arbitrations can be expensive. Reinsurance disputes, by their nature, tend to involve large losses on the part of the ceding carrier. Resolving the dispute typically involves selecting arbitrators, retaining outside counsel, and then working through the procedures designated by the reinsurance agreement. What if, at the conclusion of those arbitration proceedings, the panel simply decided to award the prevailing party its attorneys fees and arbitration costs, without explanation?

Second Circuit Upholds Fee Award Citing Inherent Authority to Sanction

The MReBA Education Committee’s first report explored this issue at the group’s November 2009 monthly meeting, sparking a lively discussion about the limits of arbitral authority and the soundness of the arbitration process itself. The starting point for the discussion was ReliaStar Life Ins. Co. v. EMC National Life Co., 473 F. Supp. 2d 607 (S.D.N.Y. 2007), 564 F.3d 81 (2d Cir. 2009). There, the Second Circuit affirmed an arbitration panel’s award of $3.85 million in costs and fees to the prevailing party, despite language in the reinsurance agreement that seemingly prohibited such an award.

ReliaStar involved a dispute over payments due under two separate but related reinsurance agreements, which the court characterized as coinsurance agreements. The two agreements contained identical language regarding the appointment of arbitrators:

• In the event of any disputes or differences arising hereunder between the parties with reference to any transaction under or relating in any way to this Agreement as to which agreement between the parties hereto cannot be reached, the same shall be decided by arbitration. Three arbitrators shall decide any dispute or difference...

The agreements continued:

 Each party shall bear the expense of its own arbitrator (whether selected by that party, or by the other party pursuant to the procedures set out [previously]) and related outside attorneys fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator.

The agreements stated that arbitration would be conducted pursuant to the laws of New York and, to the extent applicable, the Federal Arbitration Act.

A dispute arose between ReliaStar and its reinsurer, and arbitration proceedings commenced. In May 2006, following discovery, the panel of three arbitrators conducted a two-week hearing. That August, it issued a written decision in favor of ReliaStar. Without explanation, the panel’s decision awarded ReliaStar its attorneys and arbitrator’s fees and costs  $3,861,399.75. The award was affirmed by the panel upon reconsideration, on grounds that the reinsurer had approached the arbitration with a lack of good faith.

The reinsurer appealed the award of attorneys and arbitrator’s costs and fees to the Southern District of New York, which vacated on grounds that the reinsurance agreement had already allocated responsibility for those costs. As a result, the district court reasoned, the arbitrators had no authority to award ReliaStar its outside attorneys fees, notwithstanding the breadth of the agreement to arbitrate.

The Second Circuit reversed, and over a sharp dissent, determined that the court should have upheld the award so long as the arbitrators offered “a barely colorable justification for the outcome reached. It set forth a standard that “a court’s conviction that the arbitrator has ‘committed serious error in resolving the disputed issue ‘does not suffice to overturn his decision.’” The court went on to find that the arbitration clause was broad in scope, and so could colorably have led to the disputed award. It further found that a party’s bad-faith conduct in the course of an arbitration could arguably lead to a sanction, so the panel’s award of costs and fees in favor of ReliaStar did not exceed the scope of the arbitration agreement. The ability to sanction, the court reasoned, was inherent in the arbitration panel’s authority and was not expressly excluded by the parties; so the award stood.

MReBA Meeting Discussion Considers Application in Massachusetts

At MReBA’s November meeting, a lively discussion followed the case presentation, sparked by the twin observations that no Massachusetts court had issued such a broad ruling to date, but that the ReliaStar case has already been cited by arbitration panels in other jurisdictions to support fee awards.

One participant observed that this could just be an example of arbitration panels reaching their intended outcome. Most panels simply award an aggregate figure; this case was unique in that it actually itemized the award. Courts may be predisposed to uphold the award on the understanding that reinsurance agreements are “honorable undertakings that only embody general concepts, with the result that voiding the award is possible only if the panel acted significantly outside the scope of its authority or committed blatant error.

Another participant raised the troubling question of where the court would obtain its authority over the case, where the agreement stated that New York law would control. The ensuing discussion teased out some areas of tension between the Federal Arbitration Act and potentially contrary state arbitration laws. There was a further question about how far the court’s authority extended when reviewing the propriety of the award. The discussion evoked a number of views, including one to the effect that an award that seems to be mainly compensatory in nature (which would typically include an award of interest), as opposed to punitive, is likely to be upheld.

The ReliaStar decision never discussed the nature of the reinsurer’s alleged bad faith, with the result that practitioners have little guidance as to what might spark a panel’s decision to award fees and costs. In the absence of that kind of information, ceding carriers and their reinsurers both need to pay close attention to the selection of their panels  and the precise terms of their reinsurance agreements. There are many online and offline shops offer gucci bags,gucci replica watches,iwc replica watches and panerai replica watches.

Alex Henlin can be reached at ahenlin@rkmc.com.

 2010 Robins, Kaplan, Miller & Ciresi LLP. All rights reserved. www.rkmc.com

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