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CLARENDON NAT'L INS. CO. v. TIG REINSURANCE CO.

January 12, 1998

CLARENDON NATIONAL INSURANCE COMPANY, Petitioner, against TIG REINSURANCE COMPANY, f/k/a TRANSAMERICA REINSURANCE COMPANY, and TIG INSURANCE COMPANY, Respondents.

ROBERT W. SWEET, U.S.D.J.


The opinion of the court was delivered by: SWEET

Sweet, D.J.

 Petitioner Clarendon National Insurance Company ("Clarendon") has moved to vacate the arbitration award issued in the arbitration proceeding between Clarendon and TIG Reinsurance Company ("TIG"). TIG has cross-moved to confirm the award in part and to remand one issue for further determination by the arbitrators. For the reasons set forth below, the cross-motion of TIG is granted, the award is confirmed as to certain issues and one issue is remanded to the arbitrators.

 Prior Proceedings

 TIG, a Stamford, Connecticut based reinsurance company, began operations in 1987 to accept a spin-off of a segment of the reinsurance business then operated by Clarendon. Clarendon is a New York-based company that specializes in a type of reinsurance known as "financial" or "finite risk" reinsurance, a form of reinsurance in which the reinsurer's risk is more limited than in traditional reinsurance. Prior to 1987, Clarendon also wrote some traditional reinsurance business. Under the 1987 transaction, TIG accepted Clarendon's traditional, or non-financial, reinsurance business, and Clarendon retained its financial and finite risk reinsurance business. The parties accomplished this transaction through several inter-related contracts, including a Portfolio Reinsurance Agreement ("Portfolio Agreement") and a Management Agreement.

 In the transaction, TIG acquired 300 separate reinsurance treaties, the people it wanted to run the business, the ability to manage Clarendon's business going forward, and $ 73.9 million in cash from Clarendon. As part of the transaction, TIG agreed to pay the first $ 99.8 million in losses on Clarendon's behalf. TIG was protected because Clarendon would pay any losses over that amount. In the event the losses were less than $ 99.8 million or in the event that the time and distance risk proved favorable to TIG, the contracts asymmetrically allowed TIG to keep the upside.

 In exchange, Clarendon received balance sheet assistance by being able to relieve itself of $ 99.8 million in liabilities. Also, to protect Clarendon with regard to the management of its business, TIG agreed not to modify or amend the subject business without the express written permission of Clarendon.

 The Portfolio Agreement transferred to TIG the liability for losses under specified reinsurance contracts originally issued to various insurance companies by Clarendon. That agreement defined how the premiums and losses on those contracts would be divided between the two companies. The Management Agreement authorized TIG to administer the contracts transferred.

 Disputes over allocation of premiums and losses under the Portfolio Agreement and other issues led the parties to claim tens of millions of dollars from each other.

 The parties first commenced arbitration proceedings in 1992. Preparation for that arbitration followed discovery, including the exchange of documents and nearly twenty depositions. The parties settled most, but not all of the issues and documented that partial settlement through an agreement of November 17, 1994, entitled "Memorandum of Understanding." ("MOU").

 The matters that were not released were discussed in § 1.3 of the MOU. Section 1.3 reads, in pertinent part:

 
A. ARBITRATION OF CERTAIN MATTERS. Notwithstanding Paragraphs 1.1 and 1.2 [the releases], the parties agree that the following matters shall be subject to arbitration in accordance with Article 7 hereof if the parties are unable to resolve their differences within one hundred twenty (120) days from the date hereof:
 
(1) The amount of compensation, if any, whether characterized as additional premium or otherwise, owed CLARENDON by TIG arising from the amendments of treaties C1001, C1001-2, and C1001-3, between CLARENDON and Frontier Insurance Company in early 1988.
 
(2) The correct accounting treatment under the Transaction Documents of the payments made by TIG to Frontier with respect to the commutation/termination of treaties C1001, C1001-2, and C1001-3, between CLARENDON and Frontier Insurance company. The payment amount and date of commutation/termination for the three treaties is as follows: ...
 
(3) The correct accounting treatment under the Transaction Documents of: (a) contingent commissions received by CLARENDON in connection with the Frank B. Hall program; and (b) contingent commissions received by TIG RE on the Subject Business. ...
 
C. INTEREST. Any payments due the other party under Paragraph 1.3.A. shall be payable with interest within thirty (30) days of an award of an arbitration panel under article 7 hereof. Interest shall be calculated at the rate of ten percent (10%), compounded quarterly, from the date of entitlement s per the Transaction Documents to the date of payment.

 MOU, § 1.3 The parties also agreed that disputes as to the payments to be made under § 1.3.A. would be arbitrated pursuant to Article 7 of the MOU. Article 7 reads, in pertinent part:

 
The parties agree to use the existing arbitration panel to resolve any disputes hereunder, including the matters to be arbitrated under paragraph 1.3.A., assuming the arbitrators are ready, willing and able to serve. ... Notwithstanding the foregoing, all matters relating to arbitration shall be governed by the Federal Arbitration Act.

 MOU, Art. 7.

 After the execution of the MOU, the parties submitted the claims to a new panel of arbitrators subject to the limitations contained in the MOU and, subsequently, by a stipulation between the parties and the arbitrators at the preliminary organizational hearing.

 In 1995 the parties abandoned their negotiations and submitted three remaining issues to arbitration. The actual arbitration hearing began on January 29, 1997. Near the conclusion of the hearing, the parties and the arbitrators had a discussion regarding the procedure for completing the arbitration. It was determined that the arbitrators would rule upon the issue of liability first and then, depending upon the outcome, determine the issue of damages, if the parties were unable to settle within a prescribed time period.

 Post-hearing briefs were submitted to the panel. After the final briefing by the parties on March 10, 1997, the panel issued the award on the issue of the parties' respective liability (the "Liability Award"). The Liability Award reads in pertinent part:

 
1. The termination by Frontier ... of the medical malpractice treaties with Clarendon resulted in a return of premium to Frontier. Clarendon is responsible to reimburse TIG Re accordingly. ...
 
2. TIG Re breached the Management Agreement between Clarendon and TIG Re by amending the Frontier treaties retroactively to expand the treaties and lower the attachment ...

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