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In the Matter of the Arbitration Between American Centennial Insurance v. Global International Reinsurance Company

July 9, 2012


The opinion of the court was delivered by: P. Kevin Castel, District Judge:


American Centennial Insurance Company ("ACIC") brings this petition to vacate an arbitration award issued in favor of Respondent Global International Reinsurance Company, Limited ("Global"). Global opposes ACIC's petition and cross-petitions to confirm the award.

As will be explained more fully, ACIC's ownership structure evolved through a series of acquisitions and corporate reorganizations between 1999 and 2008. These events caused Global to seek a reduction in its reinsurance obligations to ACIC under the parties' reinsurance agreement. The reinsurance agreement contains an arbitration provision. The arbitration provision includes an "honorable engagement" clause, requiring the arbitrators to look beyond the "literal interpretation" of the agreement when issuing an award, and a clause requiring the arbitrators to state the "reasons" for any award.

The petition and cross-petition in this action concern the third of three arbitrations conducted between the parties (herein referred to as the "First," "Second," and "Third Arbitration"). The Third Arbitration was conducted before a panel of three industry arbitrators and included motion practice, fact discovery, briefing, and a seven-day hearing. The issues before the panel were several, and included whether certain relief awarded to Global in the First and Second Arbitrations barred further relief. By a two-to-one vote, the panel majority issued a seven-page award in favor of Global, though granting a much lower rate of reimbursement than was sought by Global. The dissenting vote was cast by ACIC's party-appointed arbitrator. ACIC's petition to vacate that award is denied and Global's cross-petition to confirm the award is granted.


ACIC is an insurance company with its principal place of business in Delaware. (Pet. ¶ 3.) ACIC has been in "runoff" since 1983, winding down its business on existing policies but issuing no new policies. (Pet. ¶ 5.) Global is a reinsurance company organized under the laws of Barbados. (Pet. ¶ 4; Cross-Pet. ¶ 1.) In 1997, ACIC and Global entered into a written reinsurance agreement (the "Agreement"). (Nonna Decl. Ex. A.) Among other things, the Agreement requires Global to indemnify ACIC for certain losses ACIC might incur under insurance policies issued to ACIC's insureds. (Pet. ¶ 6; Cross-Pet. ¶ 5.) The Agreement divides Global's reinsurance obligations into five vertical "layers" totaling $100 million. As each layer is exhausted, the Agreement moves into the next layer. (Cross-Pet. ¶ 6.) Each of the five layers varies by percentage as to Global's reinsurance obligations. (Id.)

The Agreement contains an arbitration clause, stating in pertinent part: Any dispute arising out of the interpretation, performance or breach of this Agreement, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. . . .

The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. . . . The decision of the majority of the panel shall be rendered in writing, stating the reasons therefor, and shall be final and binding. The panel is empowered to grant interim relief as it may deem appropriate. (Nonna Decl. Ex. A at G009905--06.) Each party appoints an arbitrator of its choosing, with the two party-appointed arbitrators designating an impartial umpire to preside over the panel. (Id. at G009905 ¶ B.) All arbitrators must "be present or former executive officers of insurance or reinsurance companies . . . without past employment or directional relationships" with ACIC or Global. (Id. ¶ D.) The arbitration clause also contains an "honorable engagement" provision, which states as follows:

The panel shall interpret the Agreement as an honorable engagement, and shall make its award with the view to effecting the general purpose of the Agreement in a reasonable manner rather than in mere accordance with the literal interpretation of the language. (Id. at G009906 ¶ I.) The arbitration clause quoted above remained in effect at all times relevant to this action.

The Agreement also contains a provision titled Change in Administrative and Claims Practices (the "Claims Practices Provision"). (Id. at G009909.) Essentially, the Claims Practices Provision permits Global to seek a discount in its reinsurance obligations to ACIC upon certain changes in ACIC's corporate structure or operations. The provision states in full:

If any intentional or unintentional change in the company's approach, method or guidelines in the processing, settling, administering or paying of claims, materially increases the Reinsurer's liability under this Agreement from what that liability would have been if there had been no such change, the Reinsurer shall prepare, and the Company shall accept, an adjustment of the portion of the claims which is reimbursable, or an adjustment of the Reinsurance Consideration, or any adjustments which will make the Reinsurer's risk position equivalent to that which would have been obtained under this Agreement if there had been no such change. .

Any dispute with respect to such adjustment shall be resolved by Arbitration as provided in . . . this Agreement. (Id.) The parties' First, Second, and Third Arbitrations each concern the Claims Practices Provision. ACIC's petition in this action seeks vacatur of the award and related orders issued in favor of Global during the Third Arbitration. Because the Third Arbitration in part concerned the scope of the relief awarded in the First and Second Arbitrations, the three arbitrations and the events preceding them are described below to the extent pertinent to this action.

I. The First Arbitration

In 1999, ACIC and its parent corporation were acquired by the White Mountains Insurance Group ("White Mountains"). (Pet. ¶ 16.) In June 2001, White Mountains acquired the OneBeacon Insurance Group ("OneBeacon") and made ACIC a subsidiary of OneBeacon. (Pet. ¶ 17.) In December 2001, OneBeacon made a capital contribution of $400 million to ACIC's parent corporation. (Id.) Upon learning of these transactions (herein referred to as the "White Mountains reorganization"), Global issued a reservation of rights letter to ACIC claiming that ACIC had violated the Claims Practices Provision. (Pet. ¶ 18; Cross-Pet. ¶ 10.) ACIC then commenced the First Arbitration to determine the parties' obligations regarding the White Mountains reorganization. (Pet. ¶ 19.)

The First Arbitration consisted of a six-day evidentiary hearing and resulted in an award to Global. The three-arbitrator panel (the "Tierney Panel") found that "ACIC's placement as a subsidiary of [OneBeacon] . . . would significantly affect an insured's analysis of" ACIC's ability to pay claims. (Nonna Decl. Ex. E.) Because ACIC was operating in runoff, it had successfully negotiated commutation agreements with many of its insureds, reducing ACIC's coverage liability. (Id.) *fn1 The panel found that the White Mountains reorganization, which included a $400 million contribution from OneBeacon, represented a change in its approach to commutations "in a manner materially adverse to [Global]." (Id.) Accordingly, the Tierney Panel ruled that ACIC had breached the Claims Practices Provision. (Id.)

In its Final Order and Award dated December 16, 2003, the panel awarded Global a 30% reduction of "all losses and loss adjustment expenses paid by ACIC" from January 1, 2002 through December 16, 2003 (the "Discount Period") on contracts that "were not commuted" by ACIC. (Id.) The panel explained that a "30% reduction in [Global's] liability directly correlates to . . . the relative motivations of insureds to commute." (Id.) The parties stipulated to ...

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