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NORTH RIVER INS. CO. v. PHILADELPHIA REINSURANCE C

July 13, 1994

In the matter of the Arbitration between THE NORTH RIVER INSURANCE COMPANY, Petitioner,
v.
PHILADELPHIA REINSURANCE CORPORATION, ASSICURAZIONI GENERALI, EXCESS AND CASUALTY REINSURANCE ASSOCIATION, and UNDERWRITERS AND UNDERWRITING SYNDICATES AT LLOYD'S AND FOREIGN COMPANIES SUBSCRIBING TO SECOND EXCESS OF LOSS REINSURANCE CONTRACT NO. R64939, Respondents.


HAIGHT, JR.


The opinion of the court was delivered by: CHARLES S. HAIGHT, JR.

HAIGHT, District Judge:

 Following an award rendered at the conclusion of a consolidated arbitration, the prevailing insurance company petitions to confirm the award. Respondents, the two groups of reinsurers against whom the award was rendered, cross-move to vacate it. They contend that this Court's order of consolidation was improvidently made, requiring vacatur; and that events occurring during the arbitration hearings demand the same result. Because I agree with respondents that recent Second Circuit authority condemns consolidation on the facts of this case, I vacate the award on that ground and reach no other issue.

 Background

 Petitioner North River Insurance Company ("North River") insured the GAF Corporation ("GAF"), an asbestos manufacturer, under a liability policy in effect for three annual policy periods from May 1, 1970 through April 30, 1973. During the 1980's GAF was sued in many lawsuits alleging injury from exposure to its asbestos products. North River's policy obligated it to cover such claims in the amount of $ 5 million for each of these three policy periods. In consequence it has paid out a total of $ 15 million to GAF.

 Respondents are domestic and foreign reinsurers who, together with seven other reinsurers, reinsured North River under reinsurance treaty programs in effect during the three GAF annual policy periods in suit. The treaties provided a first layer of reinsurance coverage in the amount of $ 750,000 in excess of a $ 250,000 "per occurrence" retention (or deductible), and a second layer of $ 4,000,000 in excess of a $ 1,000,000 "per occurrence" retention (the first layer of coverage). A reinsurance treaty involves an ongoing contractual relationship between insurance companies, in which the primary insurer agrees in advance to cede, and the reinsurer to accept, specified business that is the subject of the contract. Typically, as in this case, a reinsurance treaty involves the participation of many reinsurers, each accepting a percentage of the total liability under a single treaty.

 The present respondents fall into two groups. The "U.S. Reinsurers" include respondents Philadelphia Reinsurance Corporation, Assicurazioni Generali, Excess and Treaty Management Corporation (on behalf of the members of Excess and Casualty Reinsurance Association), and The Reinsurance Corporation of New York. The "London Reinsurers" include respondents Underwriters and Underwriting Syndicates at Lloyd's and Foreign Companies Subscribing to Second Excess of Loss Reinsurance Contract No. R64939. I shall hereafter refer to respondents by their respective group names.

 A reinsurer signifies its participation in a reinsurance treaty by subscribing to the treaty. In the case at bar the London Reinsurers participated only in the second layer treaties. They agreed to an "aggregate endorsement" which became a part of the treaties subscribed to by those reinsurers. The aggregate endorsement gave North River certain options in combining products liability claims and submitting them to the London Reinsurers for coverage under different formulae. The aggregate endorsement was not included in the treaties to which the U.S. Reinsurers subscribed.

 Each reinsurance treaty contained an arbitration clause, appearing in Article XV, which provided:

 
IF ANY DISPUTE SHALL ARISE BETWEEN THE REINSURED AND THE REINSURER WITH REFERENCE TO THE INTERPRETATION OF THIS CONTRACT OR THEIR RIGHTS WITH RESPECT TO ANY TRANSACTION INVOLVED, THE DISPUTE SHALL BE REFERRED TO THREE ARBITRATORS, ONE TO BE CHOSEN BY EACH PARTY AND THE THIRD BY THE TWO SO CHOSEN. IF EITHER PARTY REFUSES OR NEGLECTS TO APPOINT AN ARBITRATOR WITHIN THIRTY (30) DAYS AFTER THE RECEIPT OF WRITTEN NOTICE FROM THE OTHER PARTY REQUESTING IT TO DO SO, THE REQUESTING PARTY MAY NOMINATE TWO ARBITRATORS WHO SHALL CHOOSE THE THIRD. EACH PARTY SHALL SUBMIT ITS CASE TO THE ARBITRATORS WITHIN THIRTY (30) DAYS OF THE APPOINTMENT OF THE ARBITRATORS. THE ARBITRATORS SHALL CONSIDER THIS CONTRACT AN HONORABLE ENGAGEMENT RATHER THAN MERELY A LEGAL OBLIGATION; THEY ARE RELIEVED OF ALL JUDICIAL FORMALITIES AND MAY ABSTAIN FROM FOLLOWING THE STRICT RULES OF LAW. THE DECISION OF A MAJORITY OF THE ARBITRATORS SHALL BE FINAL AND BINDING ON BOTH THE REINSURED AND THE REINSURER. THE EXPENSE OF THE ARBITRATORS AND OF THE ARBITRATION SHALL BE EQUALLY DIVIDED BETWEEN THE REINSURED AND THE REINSURER. ANY SUCH ARBITRATION SHALL TAKE PLACE IN NEW YORK, NEW YORK, UNLESS SOME OTHER LOCATION IS MUTUALLY AGREED UPON BY THE REINSURED AND THE REINSURER.

 North River, having paid under its primary policies with GAF, presented claims under the treaties as it construed them to the reinsurers. The present respondents rejected North River's claims in whole or in part. A principal bone of contention related to the meaning of "single occurrence" as that phrase was used in the treaties to define North River's "retention," i.e., the deductible amount. North River contended that only one occurrence was involved, namely, GAF's manufacture and sale of asbestos products, and hence only one $ 250,000 retention applied. The respondents contended that the asbestos claims arose from multiple occurrences, each subject to a $ 250,000 retention. The calculation in respect of the London Reinsurers was further complicated by the effect of the aggregate endorsement.

 In December 1988, North River commenced arbitration proceedings against the four U.S. Reinsurers, who retained the same counsel to defend them, appointed the same arbitrator, Joseph P. Murphy, and by their conduct agreed to a consolidated arbitration between themselves and North River, which had appointed Vincent Vaccarello as its arbitrator. On October 3, 1989 North River served a separate notice of intention to arbitrate upon the London Reinsurers. North River again appointed Mr. Vaccarello as its arbitrator. The London Reinsurers retained different counsel from those defending the U.S. Underwriters, but appointed Mr. Murphy as their arbitrator. It may therefore be said that the London Reinsurers agreed to a consolidated arbitration between North River and themselves.

 The case first came to the attention of this Court when North River filed a petition dated October 30, 1990 under the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1 et seq. North River complained of the delay in selecting a third arbitrator. One sticking point arose from Mr. Murphy's insistence, in responding to the correspondence from Mr. Vaccarello, that he was speaking only for the U.S. Reinsurers, the London Reinsurers having not yet instructed him on the question of the third arbitrator. In these circumstances, North River petitioned the Court under FAA § 4 for an order directing that its arbitration with the U.S. Reinsurers be consolidated with the London Reinsurers arbitration, and appointing a third arbitrator to participate in that consolidated arbitration.

 The U.S. Reinsurers and the London Reinsurers, while having agreed to a single arbitration between North River and the members of those respective groups, objected to a further consolidation of the U.S. Reinsurers and London Reinsurers arbitrations into a single proceeding before one panel of arbitrators. Respondents based that ...


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