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    First State Insurance Company v. National Casualty Co, 1st Cir. (2015)

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    The United States Court of Appeals for the First Circuit affirmed a district court's decision to confirm two arbitration awards relating to reinsurance agreements between First State Insurance Company and National Casualty Company. The court declined to consider National's argument that one of the awards should be vacated because its petition to vacate was filed over 300 days after the award, well past the 90-day statutory deadline. Instead, the court proceeded directly to review the merits of National's appeal and found no error in the district court's refusal to vacate the awards, as the arbitrators acted within the scope of their contractual authority in interpreting the agreements.

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    First State Insurance Company v. National Casualty Co, 1st Cir. (2015)

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    The United States Court of Appeals for the First Circuit affirmed a district court's decision to confirm two arbitration awards relating to reinsurance agreements between First State Insurance Company and National Casualty Company. The court declined to consider National's argument that one of the awards should be vacated because its petition to vacate was filed over 300 days after the award, well past the 90-day statutory deadline. Instead, the court proceeded directly to review the merits of National's appeal and found no error in the district court's refusal to vacate the awards, as the arbitrators acted within the scope of their contractual authority in interpreting the agreements.

    Original Description:

    Filed: 2015-03-20 Precedential Status: Precedential Docket: 14-1644

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    The United States Court of Appeals for the First Circuit affirmed a district court's decision to confirm two arbitration awards relating to reinsurance agreements between First State Insurance Company and National Casualty Company. The court declined to consider National's argument that one of the awards should be vacated because its petition to vacate was filed over 300 days after the award, well past the 90-day statutory deadline. Instead, the court proceeded directly to review the merits of National's appeal and found no error in the district court's refusal to vacate the awards, as the arbitrators acted within the scope of their contractual authority in interpreting the agreements.

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    First State Insurance Company v. National Casualty Co, 1st Cir. (2015)

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    Scribd Government Docs
    The United States Court of Appeals for the First Circuit affirmed a district court's decision to confirm two arbitration awards relating to reinsurance agreements between First State Insurance Company and National Casualty Company. The court declined to consider National's argument that one of the awards should be vacated because its petition to vacate was filed over 300 days after the award, well past the 90-day statutory deadline. Instead, the court proceeded directly to review the merits of National's appeal and found no error in the district court's refusal to vacate the awards, as the arbitrators acted within the scope of their contractual authority in interpreting the agreements.

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    of 12

    United States Court of Appeals

    For the First Circuit


    No. 14-1644
    FIRST STATE INSURANCE COMPANY and
    NEW ENGLAND REINSURANCE CORPORATION,
    Appellees,
    v.
    NATIONAL CASUALTY COMPANY,
    Appellant.

    APPEAL FROM THE UNITED STATES DISTRICT COURT


    FOR THE DISTRICT OF MASSACHUSETTS
    [Hon. Rya W. Zobel, U.S. District Judge]

    Before
    Selya, Circuit Judge,
    Souter,* Associate Justice,
    and Lipez, Circuit Judge.

    Kendall W. Harrison, with whom Godfrey & Kahn, S.C., Susan A.


    Hartnett, Patrick J. Hannon, and Sugarman, Rogers, Barshak & Cohen,
    P.C. were on brief, for appellant.
    Lloyd A. Gura, with whom Michael P. Mullins, David W.S.
    Lieberman, Day Pitney LLP, Amy J. Kallal, Matthew J. Lasky, and
    Mound Cotton Wollan & Greengrass were on brief, for appellees.

    March 20, 2015

    Hon. David H. Souter, Associate Justice (Ret.) of the Supreme


    Court of the United States, sitting by designation.

    SELYA, Circuit Judge.

    A party that implores a court to

    vacate an arbitration award normally faces a steep uphill climb:


    the scope of judicial review of arbitration awards is "among the
    narrowest known in the law."

    Me. Cent. R.R. Co. v. Bhd. of Maint.

    of Way Emps., 873 F.2d 425, 428 (1st Cir. 1989).

    And where, as

    here, the arbitration clause contains an "honorable engagement"


    provision, judicial review is encumbered by yet a further level of
    circumscription. Surveying this arid landscape, the court below
    refused to vacate the challenged arbitration award and instead
    confirmed it.
    I.

    Discerning no error, we affirm.

    BACKGROUND
    In industry parlance, a primary insurer may cede risk

    to another insurer, who effectively becomes a reinsurer.

    See N.

    River Ins. Co. v. ACE Am. Reins. Co., 361 F.3d 134, 137 (2d Cir.
    2004). When a reinsurer cedes assumed risk to yet another insurer,
    that transfer is called a retrocessional agreement.

    See Compagnie

    de Reassurance d'Ile de France v. New Eng. Reins. Corp., 57 F.3d


    56, 62 (1st Cir. 1995).

    Here, First State Insurance Company and

    New England Reinsurance Corporation (collectively, First State)


    entered into a number of reinsurance and retrocessional agreements
    with a reinsurer, National Casualty Company (National).

    In August

    of 2011, First State demanded arbitration under eight of these


    agreements to resolve differences of opinion about billing disputes
    and the interpretation of certain contract provisions relating to
    -2-

    payment

    claims.1

    of

    By

    agreement

    of

    the

    parties,

    all

    the

    arbitrations were consolidated in a single proceeding before a


    panel of three arbitrators.
    At
    objection,

    First

    the

    State's

    arbitrators

    interpretation issues first.

    suggestion
    agreed

    to

    and

    over

    consider

    the

    National's
    contract

    As to those issues, First State

    sought declaratory relief addressing (i) the minimum quantum of


    information required to be furnished in order to trigger National's
    payment obligations and (ii) whether National could condition
    payment on its exercise of its contractual right to inspect First
    State's files.
    After briefing and argument, the arbitrators handed down
    a contract interpretation award dated December 13, 2012.

    This

    award established a payment protocol under the agreements, which


    provided that National's payment obligations were to be triggered
    "upon its receipt of a billing supported by a Proof of Loss and
    Reinsurance Report(s) prepared by First State in a form and content
    generally as those introduced with the briefings on this motion."
    The award further noted that "[s]aid payments may be made subject
    to an appropriate reservation of rights by [National] in instances

    The arbitration clauses in the various agreements are


    similar but not identical.
    The same holds true for the loss
    settlement provisions and the provisions granting National a right
    to inspect or audit First State's books and records at any
    reasonable time. These modest differences are not material to
    this appeal.
    -3-

    where it has or does identify specific facts which create a


    reasonable

    question

    regarding

    coverage

    under

    the

    subject

    reinsurance agreement(s)" but "[p]ayment obligations on the part of


    [National] are not conditioned upon the exercise of its right to
    audit or the production of additional information or documents,
    other than those provided by First State as described . . . above."
    First

    State

    promptly

    repaired

    to

    the

    United

    States

    District Court for the Southern District of New York and filed a
    petition pursuant to the Federal Arbitration Act (FAA), 9 U.S.C.
    9, to confirm the award.

    National moved to dismiss the petition

    or, in the alternative, to transfer venue to the District of


    Massachusetts.

    On September 27, 2013 some eight months after

    suit had been brought the court transferred the case to the
    District of Massachusetts. National thereafter cross-petitioned to
    vacate the contract interpretation award.

    See id. 10(a)(4).

    That cross-petition was not filed until October 15, 2013.


    By then, the underlying arbitration proceedings had run
    their course, and First State had petitioned in the District of
    Massachusetts to confirm the panel's final award.

    The district

    court consolidated the two confirmation petitions and, after a


    hearing, summarily confirmed both the contract interpretation award
    and the final arbitration award.

    This timely appeal ensued.

    -4-

    II.

    ANALYSIS
    National's claims of error relate only to the contract

    interpretation award.

    Before reaching them, however, we must take

    the measure of a preliminary obstacle.

    Under the FAA, a party

    seeking to vacate an arbitration award must apply to the district


    court within 90 days after the promulgation of the award.

    See id.

    12. First State asserts that National's cross-petition to vacate


    the contract interpretation award was filed outside this temporal
    window and is, therefore, time-barred.
    It is clear beyond hope of contradiction that National
    did not meet the 90-day statutory deadline. The arbitrators issued
    the

    contract

    interpretation

    award

    on

    December

    13,

    2012,

    and

    National did not file its petition to vacate that award until
    October 15, 2013 (more than 300 days later). Spinning an intricate
    web of arguments, National insists that its motion to dismiss First
    State's petition to confirm (which was filed within the 90-day
    period) could serve as a surrogate for a petition to vacate or, at
    least, had the effect of tolling the deadline.

    National adds a

    series of arguments based on First State's infelicitous choice of


    a forum, averring that it could not have filed a timeous petition
    to vacate in the Southern District of New York conditioned upon the
    disposition of its motion to dismiss without undermining its venuebased objections and unnecessarily taxing the resources of two
    district courts.

    -5-

    We need not unravel this tangled skein, however, as this


    case is easily resolved on the merits.2

    See, e.g., Cozza v.

    Network Assocs., Inc., 362 F.3d 12, 15 (1st Cir. 2004) (bypassing
    "novel jurisdictional issue" regarding timeliness of appeal in FAA
    case

    where

    matter

    was

    susceptible

    to

    straightforward

    merits

    disposition); Nisselson v. Lernout, 469 F.3d 143, 151 (1st Cir.


    2006) (bypassing unsettled prudential standing question when record
    provided clear basis to resolve case on the merits).

    On this

    understanding, we proceed directly to the merits of National's


    appeal.
    National asseverates that the district court erred in
    refusing to vacate the contract interpretation award because the
    arbitrators exceeded the scope of their authority. Since the court
    below neither conducted an evidentiary hearing nor made findings of
    fact, our review is de novo.

    See Cytyc Corp. v. DEKA Prods. Ltd.

    P'ship, 439 F.3d 27, 32 & n.2 (1st Cir. 2006).


    A

    federal

    court's

    authority

    arbitration award is extremely limited.

    to

    defenestrate

    an

    See Oxford Health Plans

    LLC v. Sutter, 133 S. Ct. 2064, 2068 (2013); Cytyc, 439 F.3d at 32.

    Although the Supreme Court has disapproved of some uses of


    hypothetical jurisdiction, see Steel Co. v. Citizens for a Better
    Env't, 523 U.S. 83, 94-95 (1998), we have held that the Court's
    rationale extends only to situations that implicate Article III
    jurisdiction. See, e.g., Nisselson v. Lernout, 469 F.3d 143, 151
    (1st Cir. 2006); McBee v. Delica Co., 417 F.3d 107, 127 (1st Cir.
    2005). We may continue to bypass thorny jurisdictional issues and
    resolve cases on the merits where, as here, those jurisdictional
    issues implicate only statutory or prudential considerations.
    -6-

    Here, the sole inquiry is whether the arbitrators "even arguably"


    construed the underlying agreements and, thus, acted within the
    scope of their contractually delineated powers. Oxford Health, 133
    S. Ct. at 2068.

    A legal error (even a serious one) in contract

    interpretation is, in and of itself, not a sufficient reason for a


    federal court to undo an arbitration award.
    F.3d at 32.

    See id.; Cytyc, 439

    Only if the arbitrators acted so far outside the

    bounds of their authority that they can be said to have dispensed


    their "own brand of industrial justice" will a court vacate the
    award. Stolt-Nielsen v. AnimalFeeds Int'l Corp., 559 U.S. 662, 671
    (2010) (internal quotation mark omitted). Put another way, as long
    as an arbitration award "draw[s] its essence" from the underlying
    agreement, it will withstand judicial review and it does not
    matter how "good, bad, or ugly" the match between the contract and
    the terms of the award may be.

    Oxford Health, 133 S. Ct. at 2068,

    2071 (internal quotation mark omitted).


    National submits that this case represents one of the
    rare instances in which the vacation of an arbitration award is
    warranted because the arbitrators exceeded the scope of their
    powers by re-writing the terms of the parties' agreements.
    view,

    the

    payment

    protocol

    fashioned

    by

    the

    In its

    arbitrators

    is

    ultracrepidarian since it obligates National to pay billings that


    may not fall within the terms and conditions of any applicable
    agreement.

    National further submits that the award effectively

    -7-

    forecloses or at least significantly impairs its broad access


    rights under the inspection and audit provisions of the agreements
    by conditioning those rights on the transmittal of an appropriate
    time-of-payment reservation of rights.

    This reservation of rights

    procedure, National says, is plucked out of thin air and not


    derived from any contract term.
    These
    ascertaining

    arguments

    whether

    comprise

    arbitrators

    more

    cry

    arguably

    than

    wool.

    In

    interpreted

    the

    underlying contract, an inquiring court must look first to the text


    of the arbitral award.

    After all, "[t]he award will often suggest

    on its face that the arbitrator was arguably interpreting the


    contract."

    BNSF Ry. Co. v. Alstom Transp., Inc., __ F.3d__, __

    (5th Cir. 2015) [No. 13-11274, Slip Op. at 4].


    The contract interpretation award here is of this genre:
    it explained that the payment protocol was, in part, "based upon
    the terms of the subject reinsurance agreements," and confined its
    inquiry into National's payment obligations to the obligations
    existing "under the subject reinsurance agreements." It is readily
    apparent, then, that the arbitrators understood the nature of their
    task.

    See Oxford Health, 133 S. Ct. at 2069; BNSF, __ F.3d at __

    [Slip Op. at 4].


    To cinch the matter, the payment protocol limned in the
    award tracks the plain language of the relevant provisions in the
    parties' reinsurance agreements.

    -8-

    By way of illustration, the

    various loss settlement provisions, see supra note 1, obligate


    National to pay either "within 15 days" or "at the same time . . .
    as the reinsured may elect to pay" or "immediate[ly]" upon the
    production of "reasonable" or "satisfactory" evidence of the amount
    "due" or "to be paid." These arrangements are generally consistent
    with the payment protocol in the arbitration award, which obligates
    National to pay "upon its receipt of a billing" supported by a
    proof of loss and reinsurance report containing, inter alia, the
    amount paid or due by First State to its insured.
    We think it noteworthy that none of the loss settlement
    provisions in the underlying agreements expressly cross-references
    the separate inspection, audit, or access to records provisions.
    The contract interpretation award mirrors this separation; it
    provides that National's payment obligations are independent of and
    not conditioned upon the exercise of National's right to inspect
    and audit First State's records. Given this structural similarity,
    we are fortified in our conclusion that the arbitrators were doing
    nothing beyond construing the underlying agreements.
    Let us be perfectly clear.

    Whether the arbitrators were

    correct either in their interpretation of the underlying agreements


    or in their implementation of a particular payment protocol is not
    within our purview.

    For present purposes, it suffices that, when

    compared to the text of the underlying agreements, the contract

    -9-

    interpretation award leaves no doubt that the arbitrators were


    arguably construing those agreements.
    This
    reservation

    of

    brings

    us

    rights

    to

    National's

    procedure

    complaint

    adumbrated

    in

    the

    that

    the

    contract

    interpretation award does not draw its essence from the underlying
    agreements.

    That

    procedure,

    National

    says,

    operates

    to

    circumscribe its broad inspection and audit rights under those


    agreements.

    We do not agree.

    Each of the eight reinsurance agreements, as well as the


    agreement to consolidate the arbitrations, contains an honorable
    engagement provision.

    This language directs the arbitrators to

    consider each agreement as "an honorable engagement rather than


    merely

    legal

    obligation"

    and

    goes

    on

    to

    explain

    that

    the

    arbitrators are "relieved of all judicial formalities and may


    abstain from following the strict rules of law."
    Until today, this court has not had occasion to address
    the operation and effect of an honorable engagement provision in an
    arbitration clause.

    We believe that an honorable engagement

    provision empowers arbitrators to grant forms of relief, such as


    equitable remedies, not explicitly mentioned in the underlying
    agreement.

    See Banco de Seguros del Estado v. Mut. Marine Office,

    Inc., 344 F.3d 255, 261 (2d Cir. 2003); Pac. Reins. Mgmt. Corp. v.
    Ohio Reins. Corp., 935 F.2d 1019, 1024-25 (9th Cir. 1991); Harper
    Ins. Ltd. v. Century Indem. Co., 819 F. Supp. 2d 270, 278 (S.D.N.Y.

    -10-

    2011).

    This is a huge advantage: the prospects for successful

    arbitration

    are

    flexibility

    to

    measurably

    enhanced

    custom-tailor

    if

    remedies

    the

    arbitrators

    to

    fit

    have

    particular

    circumstances. See Yasuda Fire & Marine Ins. Co. of Eur. v. Cont'l
    Cas.

    Co.,

    37

    F.3d

    345,

    351

    (7th

    Cir.

    1994).

    An

    honorable

    engagement provision ensures that flexibility.


    We

    therefore

    hold

    that

    the

    honorable

    engagement

    provisions in the arbitration clauses of the underlying agreements


    authorized the arbitrators to grant equitable remedies. We further
    hold that the reservation of rights procedure is such a remedy.
    Consequently, National's objection to that procedure is unavailing.
    We add a coda.
    occurred

    after

    the

    National makes much of an event that

    arbitrators

    promulgated

    the

    contract

    interpretation award: a decision by the arbitrators in the second


    phase of this arbitration that struck a reservation of rights
    letter submitted by National in connection with certain payments.
    This decision shows, as National sees it, that the reservation of
    rights procedure effectively forecloses both its inspection and
    audit rights and its ability to recoup improper payments from First
    State.
    In the Shakespearean phrase, National's fears are less
    than horrible imaginings. William Shakespeare, Macbeth, act 1, sc.
    3 (circa 1606).

    First State acknowledged both in its brief and at

    oral argument in this court that the contract interpretation award

    -11-

    does not condition National's inspection, audit, or recoupment


    rights on its submission of an appropriate reservation of rights.
    As First State concedes, the contract interpretation award leaves
    National, upon receipt of a billing from First State, with three
    options: it may (i) reject the billing, (ii) pay the billing
    without comment, or (iii) pay the billing with a reservation of
    rights.

    Whether National employs the second or third option when

    paying a particular billing, it retains the right thereafter to


    inspect First State's records, audit the claim, and seek recoupment
    through a subsequent arbitration should it conclude that payment
    was improperly made.

    First State has endorsed this reading of the

    contract interpretation award and, therefore, it cannot assert


    either the absence or inadequacy of a reservation of rights as a
    defense to future recoupment efforts by National.
    III. CONCLUSION
    We need go no further. For the reasons elucidated above,
    the denial of National's cross-petition to vacate and the order
    confirming the contract interpretation award are

    Affirmed.

    -12-

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