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BRITISH INS. CO., CAYMAN v. WATER STREET INS. CO.

April 28, 2000

BRITISH INSURANCE COMPANY OF CAYMAN, PLAINTIFF,
V.
WATER STREET INSURANCE COMPANY, LTD., DEFENDANT.



The opinion of the court was delivered by: Buchwald, District Judge.

  OPINION AND ORDER

Plaintiff British Insurance Company of Cayman ("BICC" or "plaintiff") brings this action pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq., to confirm a favorable interim order of the arbitration panel composed to resolve its underlying contract dispute with the defendant, Water Street Insurance Company ("Water Street" or "defendant"). Water Street cross moves to vacate the award pursuant to section ten of the FAA, 9 U.S.C. § 10, and to stay the arbitration proceedings pending the outcome of this motion. For the reason's set forth below, plaintiff's motion to confirm is granted and defendant's motion to vacate the arbitrator's decision is denied. Defendant's request for a stay is mooted by the issuance of this opinion and order.

BACKGROUND

Both parties in this action are engaged in the business of insurance and reinsurance and are successors-in-interest to a set of facultative reinsurance agreements*fn1 ("the Agreements") entered into in the early 1980's that are at the heart of their current dispute.*fn2 BICC is the ultimate successor to American Centennial Insurance Company ("ACIC") and Water Street is the ultimate successor to Transit Casualty Syndicate ("Transit"), the original parties to the Agreements.*fn3

Of greatest relevance to the instant set of motions is Article XVI of the parties' 1982 Semiautomatic Casualty Facultative Reinsurance Contract, which provides, in part:

[i]f any dispute should arise . . . with reference to the interpretation of this Agreement or . . . with respect to any transaction involved . . . such dispute . . . shall be submitted to three arbitrators, one to be chosen by each party and the third by the two so chosen. . . . All arbitrators shall be active or retired executive officers of insurance or reinsurance companies or Underwriters at Lloyd's, London not under the control of either party to this Agreement.

Art. XVI, ¶ A, attached to defendant's Notice of Cross Motion to Vacate the Order ("Def.Notice") as Ex. B. The clause further provides that the arbitrators:

are relieved of all judicial formalities and may abstain from following the strict rules of evidence, and they shall make their award with a view to effecting the general purpose of this Agreement in a reasonable manner rather than in accordance with a literal interpretation of the language,

id., ¶ B, and that, "the decision in writing of any two arbitrators, when filed with the parties hereto, shall be final and binding upon both parties." Id., ¶ C.

In April of 1989, Water Street, through its vice president, sent a letter to BICC's predecessor complaining of the latter's failure to provide certain information and its refusal to allow Water Street to exercise its audit rights under the Agreements, warning that Water Street had reached the conclusion that it was free of liability to BICC's predecessor. Letter of John T. Banks dated Apr. 26, 1989, attached to Def. Notice as Ex. C. Even after BICC allowed a March 1990 audit to take place, Water Street still maintained the position that full disclosure had not been provided and that it had "no alternative but to confirm a complete Reservation of all Rights" under the Agreements. Letter of John T. Banks dated July 10, 1990, attached to Def. Notice as Ex. C (Water Street's "reservation of rights letter").

It was not until 1997 that BICC's immediate predecessor*fn4 finally issued a demand for arbitration through counsel claiming that Water Street owed it $1,569,257.17 under the Agreements. Letter of Shawn L. Kelly dated Dec. 9, 1997, appended to O'Donnell Aff. as Ex. E (BICC's "demand letter").*fn5 The panel of arbitrators was formally chosen in late 1999. BICC, pursuant to its original demand letter, chose Caleb Fowler ("Fowler"), a former President of CIGNA Property and Casualty Companies and a veteran of over forty arbitrations as both arbitrator and umpire. See Ex. 3, appended to the Supplemental O'Donnell Aff., dated Mar. 17, 2000 ("O'Donnell Supp."). Water Street chose Kevin Ruanne ("Ruanne"), "a former insurance company accountant with considerable experience processing and handling facultative insurance contracts and claims, but without any prior arbitration experience." Bickford Aff. ¶ 17. See also Bickford Aff. Ex. O. Together, Fowler and Ruanne chose Robert F. Hall, a former vice president and claims adjuster at three national insurance and reinsurance companies, and a 39-time former arbitrator, to serve as the panel's umpire. See O'Donnell Supp. Ex. 2.

Counsel for both parties met with the arbitrators for an organizational meeting on October 18, 1999. See Transcript of the Proceedings, appended to O'Donnell Aff. as Ex. F ("Tr."). In advance, each of the arbitrators received "issue statements" from the two parties, setting out their initial concerns and theories of the case. See Letter of Peter H. Bickford dated Sept. 28, 1999, appended to O'Donnell Aff. as Ex. D. Then, at the meeting, each arbitrator divulged to the parties all of his prior contacts with the parties and the other members of the panel, and gave both counsel an opportunity for further inquiry. Tr. 6-16. Both sides accepted the panel as constituted and signed a stipulation to that effect. Tr. 19; Stipulation dated Oct. 18, 1999, appended to O'Donnell Supp. as Ex. 1.

Before the organizational meeting was adjourned, BICC's counsel raised the topic of its proposal that Water Street be required to post a security to ensure that any recovery awarded to the plaintiff would be available. Tr. 30-31. BICC requested the opportunity to brief the issue, as well as submit a reply brief and to be heard in oral argument. Tr. 31. Hall suggested, and both sides accepted, a procedure whereby the hearing would be done by conference call upon completion of the briefing. Tr. 31-33. Water Street reluctantly accepted BICC's request to file a reply brief, reserved judgment as to whether it desired to file a surreply, and left the scheduling of the briefing "to the panel's discretion." Id. The only issue that Hall left open for the panel to discuss was whether the hearing should be "by telephone or in person." Tr. 33.

BICC filed its motion in favor of the security award on October 7, 1999, requesting that Water Street establish a letter of credit or an escrow account in the amount of $1.7 million, pending a final award in the arbitration. O'Donnell Aff. Ex. G. BICC argued, inter alia, that at the time the parties had entered into the Agreements, Water Street's predecessor had been a member of the New York Insurance Exchange ("NYIE"), which provided its own particular taking the position that a "full and fair hearing on the amount of [BICC's] request" was mandatory. Id. at 7-10. Finally, Water Street maintained that "no exigent circumstance or equitable basis" justified an order of security since the dispute had gone on for "more than a decade" with "the appearance of unclean hands." Id. at 10-11.

BICC filed a reply brief on November 11, 1999. O'Donnell Aff. Ex. I. In it, BICC included additional evidence of Water Street's financial instability, including a June 13, 1989 letter from Water Street's vice president to plaintiff's predecessor admitting that a financing problem, and the New York State Insurance Department's resulting actions, would "severely restrict the ability of [Water Street] to conduct ongoing business" that "may well [make Water Street] subject to liquidation proceedings." Id. Moreover, BICC provided a copy of a December 19, 1991 letter by Water Street's current counsel describing the "winding down [of] operations" of the NYIE, which Water Street had argued would provide an additional measure of security in the current arbitration. Id. BICC also provided additional proof of its previous attempts to secure payment from Water Street. Id. Finally, BICC argued that, although it had referred to New York Insurance Law § 1213 "for guidance," that the panel "has the intrinsic authority to award a pre-hearing security," regardless of the technical procedural requirements of § 1213. Id.*fn6

During the briefing period, Hall sent a letter to Water Street on behalf of the panel, requesting that defendant provide the panel with its "sworn annual statement and last quarterly statement . . . together with documentation showing who owns and controls Water Street." Letter of Robert F. Hall, dated Nov. 8, 1999, appended to Def. Notice as Ex. D. Presumably, this inquiry was meant to assist the panel in determining the necessity and proper amount of any security order. Water Street responded with a November 15, 1999 letter from its counsel asking the panel for clarification as to its motives for requesting the financial information, urging that any such information be provided to the panel in camera, and requesting permission to respond to BICC's reply brief. Letter of Peter H. Bickford, dated Nov. 15, 1999, appended to Def. Notice as Ex. E. BICC again took a diametrically opposed position, arguing that an in camera submission would be "highly improper and completely unjustified," and that Water Street's request for a surreply would merely "further delay resolution of the pre-hearing security issue." Letter of Brian E. O'Donnell, dated Nov. 16, 1999, appended to O'Donnell Supp. as Ex. 8.

On December 2, 1999, the arbitration panel conferred with one another and made five rulings related to the conduct of the case. Letter of Robert F. Hall, dated Dec. 2, 1999, appended to Def. Notice as Ex. F (the panel's "five points letter"). Without comment, the panel ordered Water Street to produce its records within one week. Id. It stated that it did not need to provide a rationale for the order and that Water Street's request to submit a reply brief was denied. Id. Water Street reluctantly complied with the panel's order by supplying its 1998 audited financial statements and a "certificate of compliance" issued by the Cayman Islands Monetary Authority, but did so under a cover letter expressing a "full reservation of rights," and again arguing its position that since the current financial statements had nothing to do with the underlying dispute, BICC was not entitled to them. Letter of Peter H. Bickford, dated Dec. 8, 1999, appended to Def. Notice as Ex. G. In that letter, Water Street formally requested oral argument on the subject of the proposed security and first implied that the panel had begun to exceed its authority. Id.*fn7 The panel responded with another unexplained, summary order directing Water Street to provide BICC with the financial records and denying the request for oral arguments. Letter of Robert F. Hall, dated Dec. 13, 1999, appended to Def. Notice as Ex. H.

As provided in the its "five points letter," the panel convened on December 14, 1999 to consider plaintiff's request for the security. Def. Notice Ex. I. The panel's ruling, ordering Water Street to provide a security in the amount of $1.7 million by January 5, 2000 ("the December 15, 1999 Order"), was faxed to the parties on December 16, 1999. Id.*fn8 Soon after, Water Street's counsel made an ex parte phone call to its appointed arbitrator, Ruanne, to ask if the panel's decision was unanimous. Letter of Kevin Ruanne, dated Dec. 16, 1999, appended to Def. Notice as Ex. J. In a letter to the other members of the panel dated that same day, Ruanne stated that he had been outvoted and that in his opinion, there was no basis for a security in the first instance and no basis for the extremely high amount awarded by the panel in the second instance. Id. Further, Ruanne accused the panel's umpire, Hall, of misleading him into believing that he was required to sign the panel's order. Id.

Irrespective of the growing dissension on the panel, Hall and Fowler continued to act, in accordance with the arbitration clause provision for majority rule. On December 20, 1999, Hall sent a fax to both sides requesting confirmation that Water Street had provided BICC with its financial information. Letter of Robert F. Hall, dated Dec. 20, 1999, appended to Def. Notice as Ex. K. BICC's counsel soon after sent a fax to the panel requesting that the panel forward the documents to BICC. Letter of Brian E. O'Donnell, dated Dec. 20, 1999, appended to Def. Notice as Ex. K. Water Street, in turn, took the position that since the panel had already made its decision on the issue of a security, its direction regarding the financial statements had been rendered moot. Letter of Peter H. Bickford, dated Dec. 21, 1999, appended to Def. Notice as Ex. L. The panel again conferred and the majority reaffirmed its earlier position. However, instead of confirming its order that Water Street provide the documents, Hall himself provided BICC with Water Street's financial statements. Letter of Robert F. Hall, dated Dec. 22, 1999, appended to Def. Notice as Ex. M.

Water Street reacted with "outrage." Letter of Peter H. Bickford, dated Dec. 23, 1999, appended to Def. Notice as Ex. N. Among other things, Water Street accused the panel of "grossly prejudicial and improper conduct," and "demand[ed] that Messrs. Hall and Fowler immediately withdraw from the Panel in this arbitration." Id. Specifically, Water Street charged the majority with violating two cannons of their governing organization's "Code of Conduct," (1) fairness, because of their "obvious bias," and (2) competence, for the majority's alleged "lack of appreciation for the differences between" facultative and treaty reinsurance. Id.

Hall reacted with a two-line fax describing Water Street's assertions as "fallacious and incorrect," and refusing to step down. Letter of Robert F. Hall dated Dec. 22, 1999, appended to Def. Notice as Ex. N. Fowler similarly responded that he "reject[ed Water Street's] characterization of the Panel's action and [would] not resign." Letter of Caleb L. Fowler dated Dec. 27, 1999, appended to Def. Notice as Ex. N. More missives on the topic followed from each side.

On December 30, 1999, the panel convened again by telephone conference to decide how to proceed and issued a series of directives to both sides in a fax from Hall. Letter of Robert F. Hall dated Dec. 30, 1999, appended to Def. Notice as Ex. O. In it, the panel "requested" that Water Street "inform" it whether the company had "any objections to the form" of security suggested by BICC. Id. Water Street replied with a January 5, 2000 letter from counsel "offer[ing] to provide some amount of security without prejudice to its objections and defenses" but "request[ing] that the Panel reconsider the amount." Letter of Peter H. Bickford dated Jan. 5, 2000, appended to Def. Notice as Ex. P, and to O'Donnell Aff. as Ex. J. Water Street offered the amount of $215,956.00, taking the ...


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