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Case Note:
One Beacon v. Swiss Re  An Arbitration Panel’s Limits on “Custom and Practice Discovery and Testimony Does Not Provide Grounds for Vacating Award Under “Manifest Disregard of the Law Standard

by ~ Erin N. Roth (Email) (Web Site)

In OneBeacon America Insurance Co. v. Swiss Reinsurance America Corp., 2010 U.S. Dist. LEXIS 136039 (D. Mass. Dec. 23, 2010), a Massachusetts District Court judge recently followed the First Circuit’s highly deferential standard for reviewing an arbitration award, even in the face of allegations of misconduct in the handling of discovery by the arbitration panel. The case involved a dispute between OneBeacon and its reinsurer (Swiss Re) over the cedent’s demand for reimbursement of sums that it had paid to its insureds to settle non-products asbestos claims.

The reinsurance contract at issue was a Multiple Line Reinsurance Treaty Contract (“Treaty) under which Swiss Re’s obligations were not triggered until OneBeacon first paid a specified retention amount. The retention was to be applied on a “per occurrence annual basis, where “occurrence was defined under the Treaty for non-products purposes as “injuries to one or more than one person resulting from infection, contagion, poisoning or contamination proceeding from or traceable to the same causative agency. Any disputes between the parties arising out of the Treaty were to be resolved pursuant to the Treaty’s arbitration clause.

Such a dispute arose when OneBeacon sought to aggregate non-products liability claims from six different policyholders into a single occurrence, thereby reaching the Treaty’s threshold retention amount and exposing Swiss Re to approximately $9 million in liability to OneBeacon. Swiss Re rejected OneBeacon’s attempt to aggregate multiple policyholders non-products claims under the Treaty and the resulting dispute was submitted to an arbitration panel.

During the course of the arbitration, OneBeacon asked the arbitrators for permission to depose numerous current and former Swiss Re employees to prove that the reinsurance industry custom was to aggregate non-product liability claims into a single occurrence so as to reach the reinsurer’s retainer. Swiss Re objected to such discovery on the grounds that the only issue before the panel was contract interpretation and thus the depositions were unnecessary. Despite Swiss Re’s objections, the Panel permitted discovery on industry custom and practice, but limited both parties to one deposition of a designee who was charged as that party’s “most knowledgeable [person] with respect to industry custom and practice with respect to causative agency/aggregation and course of dealings under the [Treaty]. When both OneBeacon’s and Swiss Re’s designated witnesses testified that they were unaware of any industry custom and practice with respect to aggregation of non-product asbestos losses, the Panel ruled that no such custom and practice exists and precluded further “custom and practice discovery.

At the arbitration hearing, the Panel limited the testimony of OneBeacon’s fact witness to fact-based testimony  what the witness saw, did or heard  and prohibited the witness from testifying regarding his understanding of the contract. The Panel additionally refused to allow direct expert testimony on “custom and practice and instead only permitted the parties to submit expert reports for the Panel’s review.

The Panel considered the parties evidence and ultimately rejected OneBeacon’s attempt to aggregate its non-products claims under the Treaty. According to the Panel, the mere presence of asbestos in multiple locations did not constitute the “same causative agency. As such, Swiss Re was not required to pay the aggregated claims and an award was entered in Swiss Re’s favor.

The dispute then came before the Massachusetts District Court on OneBeacon’s motion to vacate the award and on Swiss Re’s motion to confirm it. OneBeacon argued that the limitations and restrictions that the Panel placed on its requested discovery amounted to a denial of a full and fair hearing and thus presented a basis for vacating the award. Specifically, OneBeacon claimed that the person designated by Swiss Re as its “most knowledgeable deponent lacked the requisite personal knowledge regarding industry custom and practice at issue and, further, failed to educate himself on the topic. OneBeacon also claimed that the limitations placed on its fact and expert testimony at the hearing were improper and deprived it of a fair hearing.

The District Court (Saris, J.) began her analysis with a cogent summary of the First Circuit’s jurisprudence on the limited scope of a federal court’s review of an arbitration award, noting that the court may vacate an arbitration award only “when there was misconduct by the arbitrator, when the arbitrator exceeded the scope of her authority, or when the award was made in manifest disregard of the law. The District Court also recognized that “[t]he standard for reviewing an arbitration decision is extremely deferential to the arbitrator, embodying ‘one of the narrowest standards of judicial review.’” Neither an error of law or fact, a misreading of a contract (so long as the panel arguably construes or applies the contract), nor a mistaken judgment as to an appropriate remedy where a panel has been authorized to decide that question, will justify an award being set aside by a reviewing court.

Applying these principles, the District Court acknowledged that while discovery had been limited by the Panel, the imposition of limits on discovery and the form of expert testimony was “within the Panel’s broad procedural discretion and therefore did not constitute misconduct or deprive OneBeacon of a fair hearing. Notably, the case suggests that so long as a party to a reinsurance arbitration has an opportunity to present evidence on its behalf, any reasonable limitations placed on that evidence will be permitted as an exercise of the arbitration panel’s expansive discretion. Whatever the style you want, our trendy hermes replica handbags,breitling replica,replica watches uk and replica rolex watches variety will supply it.

Erin N. Roth can be reached at eroth@zelle.com.
 2011 Zelle Hofmann Voelbel & Mason LLP. All rights reserved.

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