Revisiting The Scope Of The Panel's Authority To Rewrite The Reinsurance Contract: Harper Insurance Limited V. Century Indemnity Company 10 Civ. 7866 (S.D. N.Y. July 28, 2011)

In recent years, the question of whether the arbitration panel has the authority to rewrite terms of the reinsurance contract in resolving disputes between cedents and reinsurers has played prominently in the courts in the United States. In visiting the question in 2010, the U.S. Court of Appeals for the 3rd Circuit affirmed the trial court's vacatur of an arbitration award where the panel crafted a remedy beyond the terms of the contract. In PMA Capital Insurance Company v. Platinum Underwriters Berm., Ltd., 659 F. Supp. 2d 631 (E.D. Pa. 2009), aff'd 400 Fed. Appx. 654 (3d Cir. 2010), the trial court vacated an arbitration award finding that the arbitration panel exceeded its authority by removing a "Deficit Carry Forward Provision" from the reinsurance agreement.

In that case, the parties, an insured and reinsured, disputed whether a reinsurer, pursuant to the Deficit Carry Forward provision, could carry forward losses from years that it was not a party to the agreement. Providing no explanation, the arbitration panel held, among other things, that "'any and all references to a deficit carry forward in the [2003 Agreement will be] removed from the contract.'" The arbitration panel reached this conclusion notwithstanding the fact that the agreement contained an "honorable engagement" provision. The district court vacated the award, finding that the arbitrators acted outside the scope of their authority in removing the Deficit Carry Forward provision from the agreement. The 3rd Circuit affirmed, finding that although courts have generously read "honorable engagement" provisions to provide the panel with wide discretion, such discretion is not without limits.

Most recently, the U.S. District Court for the Southern District of New York reached a different result confirming an arbitration award where the panel in a reinsurance arbitration crafted a remedy requiring a prepayment obligation on the reinsurer not found in the original contracts. In Harper Insurance Limited v. Century Indemnity Company, the trial court denied the reinsurers' motion to vacate an arbitration award setting a prepayment provision governing the payment of covered claims under the reinsurance treaty. See Memorandum and Order at 10 Civ. 7866 (S.D. N.Y. July 28, 2011). In this case, the petitioners, Harper Insurance Limited, River Thames Insurance Company Limited, and Guildhall Insurance Company Limited, were London market companies (referred to as petitioners or LMCs). These entities comprised a subset of a larger group of London Market Reinsurers (LMRs), which were parties to "Treaty 101," a reinsurance agreement with Century Indemnity Company (Century). Treaty 101 was effective beginning January 1, 1965 through December 31, 1967. Pursuant to Treaty 101, the LMRs were obligated to indemnify Century against certain levels of liability arising out of asbestos-related bodily injury claims. Treaty 101 provided that the "'liability of the Reinsurers shall follow that of the Company in every case' and that 'all payments of claims...