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Insurance Company of North America v. Public Service Mutual Insurance Co.

December 12, 2008

IN THE MATTER OF THE PETITION OF INSURANCE COMPANY OF NORTH AMERICA (NOW KNOWN AS CENTURY INDEMNITY COMPANY AND INA REINSURANCE COMPANY (NOW KNOWN AS R&Q REINSURANCE COMPANY), PETITIONERS,
v.
PUBLIC SERVICE MUTUAL INSURANCE COMPANY RESPONDENTS.



The opinion of the court was delivered by: Hon. Harold Baer, Jr., United States District Judge

OPINION & ORDER

Before the Court is the question of whether an arbitration proceeding halted in medias res upon the resignation of one party-appointed panelist may continue or whether under such circumstances the arbitration must commence anew. Petitioners, Insurance Company of North America (now known as Century Indemnity Company) and INA Reinsurance Company (now known as R&Q Reinsurance Company) (collectively, "INA"), petition the Court for an order that (1) permanently stays the arbitration commenced in April 2007 by Respondent and Cross-Petitioner Public Service Mutual Insurance Company ("PSMIC"), (2) disqualifies the arbitral panel comprised of two of the original arbitrators and a third panelist purportedly appointed by PSMIC on INA's behalf and (3) compels the parties to arbitrate before a panel comprised of two arbitrators selected by INA and an umpire to be chosen. In a cross-petition, PSMIC seeks an order that (1) compels the parties to proceed in the pending arbitration before the remaining members of the original panel, plus a third arbitrator purportedly appointed by PSMIC on INA's behalf (or, in the alternative, a replacement arbitrator appointed by the Court); and (2) confirms the original panel's summary judgment order pursuant to Section 9 of the Federal Arbitration Act, 9 U.S.C. §9. For the following reasons and based on the unique facts of this case, the arbitration must commence anew. Therefore, INA's petition is granted in part and denied in part and PSMIC's cross-petition is denied.

FACTUAL BACKGROUND

The underlying dispute concerns reinsurance provided by INA to PSMIC pursuant to a series of First Blanket Casualty Excess of Loss Reinsurance Contracts, effective from 1971 to 1986 (the "Reinsurance Contracts"). In 2005, PSMIC settled a claim for environmental liability incurred by its insured Deleet Merchandising Corporation ("Deleet") at a site in Newark, New Jersey. Decl. of Daniel Hargraves, dated September 26, 2008 ("Hargraves Decl."), Ex. 15 at 5. PSMIC settled the claim and allocated the loss pro-rata over the 15 primary insurance policies PSMIC had issued to Deleet between 1971 and 1986. Id. Based upon this allocation, PSMIC billed its reinsurers, including INA, for their respective portion of the reinsured loss. Hargraves Decl. Ex. 15, at 6. INA disputed the propriety of the pro-rata allocation, contending that PSMIC's billing did not accurately represent the risk to the underlying policies and was thus improper, unreasonable, and contrary to case law that INA contended controlled the dispute, namely the New Jersey Supreme Court's decision in Carter-Wallace v. Admiral Insurance Co., 154 N.J. 312 (1998) ("Carter Wallace"). Hargraves Decl. Ex. 5 at 1, 5.

PSMIC demanded arbitration of the dispute on April 9, 2007 pursuant to the arbitration provisions of the Reinsurance Contracts, each of which provides that a dispute under the applicable contract "shall be submitted to three arbitrators, one to be chosen by each party, and the third by the two so chosen." Decl. of Raymond Mastrangelo, dated August 1, 2008, ("Mastrangelo Decl.") Ex. A., at 14. The arbitration provisions further provide that "[i]f either party refuses or neglects to appoint an arbitrator within thirty days after receipt of written notice from the other party requesting it to do so, the requesting party may appoint two arbitrators." Id. PSMIC named Thomas M. Tobin as its party-appointed arbitrator and INA named John D. Sullivan. Roger Moak was selected as the umpire (the panel comprised of Tobin, Sullivan and Moak is hereinafter referred to as the "Original Panel"). Hargraves Decl. Ex. 3.

The parties agreed to a pre-hearing discovery and briefing schedule that provided that either party could make a motion for summary judgment at any time prior to February 1, 2008.*fn1

Hargraves Decl. Ex 11, 15. On that date, PSMIC served a summary judgment motion that sought payment of the entire balance it claimed was due from INA for the Deleet loss, pre-award interest, and expenses, costs and attorneys' fees incurred in both the arbitration and in connection with the Deleet loss. Hargraves Decl. Ex 15, at 30.

In its memorandum of law in support of its summary judgment motion, PSMIC characterized INA's contention that the Deleet loss should have been allocated in accordance with the formula set forth in Carter-Wallace as INA's "sole defense." Id. at 1. PSMIC argued that Carter-Wallace had no application to the dispute because the Reinsurance Contracts provide that PSMIC is the "sole judge" of amounts paid under its primary policies, the Carter-Wallace formula is inapplicable to a single insurer's allocation of a settlement among its own policies or in the reinsurance context, and, in any event, New York law, not New Jersey law, controlled the dispute. Id. at 1-3; Hargraves Decl. Ex. 17. In opposition, INA argued that PSMIC's allocation of the Deleet loss was unreasonable and not made in good faith, primarily, but not exclusively, because PSMIC did not follow the formula set forth in Carter-Wallace. Hargraves Decl. Ex. 16. INA also argued that PSMIC misrepresented to INA how the settlement was in fact allocated, that the factual question of reasonability could not be decided on summary judgment, and that such a motion was premature because discovery was not then complete. Id.

After hearing several hours of oral argument on April 3, 2008, the Original Panel issued a unanimous decision in an Order dated April 7, 2008 (the "Summary Judgment Order") that ruled that New York law, not New Jersey law, applied to the dispute and that 3. Accordingly, [PSMIC] having made a reinsurance allocation which was not based on Carter-Wallace, is found not to have rendered that allocation unreasonable under North River [Insurance Co. v. ACE American Reinsurance Co., 361 F.3d 134 (2d Cir. 2004)] and Travelers [Casualty & Surety Co. v. Gerling Global Reinsurance Co. 419 F.3d 181 (2d Cir. 2005)]. As no dispute is found as to whether [PSMIC's] reinsurance allocation is within the treaties at issue, the parties will now focus any further discovery and their hearing preparation on whether-for reasons other than Carter-Wallace-[PSMIC's] reinsurance allocation was made in bad faith or was unreasonable.

4. [PSMIC's] motion is in all other respects denied-without prejudice to [PSMIC] renewing its application for interest, fees, and costs if the Panel ultimately finds the reinsurance allocation to have been reasonable and in good faith.

Hargraves Decl. Ex. 19.*fn2 As of the date of the Summary Judgment Order, the hearing was scheduled to commence May 9, 2008.

On April 18, 2008 INA served a motion seeking reconsideration of the Summary Judgment Order and separately moved to adjourn the hearing. Id. atEx. 21. With PSMIC's consent, Roger Moak, umpire of the Original Panel, set a briefing schedule for the motion to reconsider pursuant to which PSMIC's opposition brief was due on May 2, 2008. Id. at Ex. 23. On May 2, 2008 John Sullivan, INA's party-appointed arbitrator, notified the parties that he was forced to resign from the panel for health reasons. Id. at Ex. 24.

After Sullivan's withdrawal, the dispute at issue before this Court arose in series of letters between the parties and the remaining members of the Original Panel. PSMIC demanded that INA appoint an arbitrator to replace Sullivan. Id. at Ex. 27. INA contended that the Second Circuit's decision in Marine Products v. MT Globe Galaxy, 977 F.2d 66 (2d Cir. 1992) ("Marine Products"), required that the arbitration must "commence anew" and purported to appoint Andrew Noga as its party-appointed arbitrator in a new arbitration proceeding, conditionally appointing him as Sullivan's replacement should it ultimately be determined that the existing arbitration must continue. Id. at Ex. 29. More than thirty days after its initial demand, and after INA had refused to authorize Mr. Noga to proceed in the existing arbitration citing his "conditional" appointment, PSMIC purported to appoint James White as INA's panelist in the existing proceeding. Id. at Exs. 32, 35. Subsequently INA purported to appoint Lee Rutledge as PSMIC's party-appointed arbitrator in the "new" arbitration proceeding. Id. at Ex. 41. Umpire Roger Moak, writing for the Original Panel, opined ...


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