It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"
Upton Sinclair
| Federal Judge Vacates Reinsurance Award for Evident Partiality | Related Document: Opinion - REI-1003-01 (PDF format)
| NEW YORK — A New York
federal judge has vacated a reinsurance arbitration award, rendered by a majority of the three-member panel, on the grounds
of evident partiality. The court ruled that the umpire and the party-appointed arbitrator for the prevailing party failed
to disclose a material conflict of interest that arose due to their involvement in an earlier arbitration that involved a
party that was related to the prevailing party, a common witness and common issues. Scandinavian Reinsurance Company Ltd.
v. St. Paul Fire & Marine Insurance Co., et al., No. 09-9531 (S.D. N.Y.).
On Feb. 23, Judge Shira A. Scheindlin
of the U.S. District Court for the Southern District of New York granted the petition of Scandinavian Reinsurance Company
Ltd. to vacate a 2009 arbitration award that a majority of the panel rendered in favor of St. Paul Fire & Marine Insurance
Co.
In August 1999, Scandinavian and St. Paul entered into a retrocessional casualty stop loss agreement, under
which St. Paul ceded a portion of its casualty reinsurance portfolio to Scandinavian.
A dispute arose as to whether
a cap on Scandinavian's liability should be read into the agreement because the parties intended to pass only a limited
amount of risk to Scandinavian or alternatively, whether the agreement should be rescinded because St. Paul misrepresented
the amount of liability Scandinavian faced under the agreement. The parties also disputed whether the agreement created one
experience account that applied to the entire term of agreement or separate experience accounts for each year covered by the
agreement.
St. Paul demanded arbitration in September 2007. Scandinavian appointed Jonathan Rosen as its arbitrator
and St. Paul appointed Peter Gentile. Rosen and Gentile selected Paul Dassenko to be the umpire.
An evidentiary
hearing was held from June 14, 2009, through July 2, 2009. Scandinavian’s witness, Bart Hedges, testified that Scandinavian
“would never have entered” the retrocessional agreement if it had been made aware of the amount of liability it
could potentially face.
In an Aug. 19, 2009, award, a majority of the arbitration panel determined that the retrocessional
agreement was “valid and enforceable” and must “be applied based on the written terms of that agreement.”
The award further stated that the retrocessional agreement provided for separate experience accounts for each underwriting
year and that the accounts “be administered and applied in the manner set forth by St. Paul at the hearing.”
Scandinavian Re moved to vacate the award, asserting that Dassenko and Gentile failed to disclose their involvement,
as umpire and a party-appointed arbitrator for the prevailing party, in an earlier arbitration between Platinum Underwriters
Bermuda Ltd. and PMA Capital Insurance Co., in which the prevailing party was, Scandinavian Re alleged, a successor to the
business of St. Paul.
In 2003, PMA and Platinum entered into a finite retrocessional agreement under which PMA
ceded certain insurance risks to Platinum. Hedges negotiated and signed the agreement on behalf of Platinum.
Platinum
demanded arbitration in June 2008 to resolve a dispute concerning the validity and scope of the deficit carry forward provision
contained in the agreement. Specifically, Platinum sought “a declaration that, in the calculation of the balance of
the experience account under Article 15 of the agreement, Platinum is entitled to the benefit of the deficit carry forward
from PMA's 1999-2001 contract with St. Paul Re.” The parties also disputed whether the agreement created one experience
account or three separate annual experience accounts.
Platinum appointed Gentile as its party-arbitrator and Dassenko
was chosen as the umpire. David Thirkill served as PMA's party-appointed arbitrator.
Platinum's counsel
used Hedges' testimony to argue that the agreement should be enforced as written. In a May 2009 award, the arbitration
panel determined that all references to a deficit carry forward provision in the Platinum agreement should be “removed
from the contract.” The U.S. District Court for the Eastern District of Pennsylvania later granted PMA’s petition
to vacate the award on the grounds that it could not be rationally derived from the parties' submissions and was “completely
irrational.”
According to the court, after being named as arbitrators in the Scandinavian arbitration, neither
Gentile nor Dassenko disclosed that they were chosen to be arbitrators in the Platinum arbitration. Nor did they disclose
that Hedges, a witness in the Scandinavian arbitration, was also a witness in the Platinum arbitration.
Scandinavian
did not learn that Dassenko and Gentile served together on the Platinum arbitration until Oct. 22, 2009. Scandinavian asserted
that if Dassenko or Gentile had disclosed their connection with the Platinum arbitration, it would have objected to and sought
their recusal if they refused to voluntarily resign from the Scandinavian arbitration.
The parties disagreed as
to the extent of the relationship between St. Paul and Platinum. Scandinavian characterized Platinum as St. Paul's “successor
entity,” while St. Paul argued that Platinum “does not now, nor has it ever, shared any corporate interrelatedness
with St. Paul.”
Scandinavian alleged that St. Paul administers the agreement under which St. Paul contributed
its reinsurance business and assets to Platinum Holdings' consolidated operations and receives several hundred thousand
dollars in fees annually from Platinum. St. Paul admitted that Travelers Special Services receives approximately $300,000
“to administer claims and to provide actuarial and administrative services,” but claims that these fees are for
business ceded by St. Paul to Platinum Reinsurance Underwriters Inc. The parties agreed that Travelers currently holds a financial
stake in Platinum.
St. Paul argued that Scandinavian’s petition to vacate the award is time-barred because
it failed to serve a summons on St. Paul before the expiration of the three-month statute of limitations. In response, Scandinavian
cited Homes Ins. Co. v. RHA/Penn. Nursing Home Inc. (113 F.Supp.2d 633, 635 n. 10, S.D. N.Y. [2000]), which states that
Section 9 of Title 9 of the United States Code only contemplated “service of notice of the application to confirm the
arbitration award, not a summons.”
Judge Scheindlin found Homes Ins. Co. is applicable, concluding
that the petition is not time-barred. By agreeing to arbitrate in New York and agreeing that courts having jurisdiction over
New York could enforce the award, Scandinavian and St. Paul consented to personal jurisdiction in the Southern District of
New York, the judge explained. Therefore, service “was only necessary to alert St. Paul of the petition to vacate”
and Scandinavian's failure to serve a summons “can be excused in the interests of justice because Scandinavian provided
actual notice of the Petition to St. Paul thereby effectuating the sole purpose of service,” Judge Scheindlin concluded.
Turning to the issue of evident partiality, the judge applied the standard set forth in Applied Industrial
Materials Corp. v. Olvalar Makine Ticaret Ve Sanalyli A.S. (492 F.3d 132, 2d Cir. [2007]). In Applied Industrial,
the 2nd Circuit ruled, “An arbitrator who knows of a material relationship with a party and fails to disclose it meets
the evident partiality standard. A reasonable person would have to conclude that an arbitrator who failed to disclose under
such circumstances was partial to one side.”
St. Paul argued that Applied Industrial is inapplicable
because it addresses an undisclosed relationship between an arbitrator and a party to the arbitration, whereas this case addresses
the undisclosed relationships between two arbitrators and/or between an arbitrator and a non-party. Judge Scheindlin disagreed,
stating that it is the materiality of the relationship that is dispositive, not the arbitration participant with whom the
relationship exists.
“St. Paul does not (and cannot) argue that either Dassenko or Gentile disclosed their
service as arbitrators in the Platinum arbitration or that they had heard testimony from Hedges less than three months prior
to his testimony in the Scandinavian arbitration,” the judge wrote. “Dassenko and Gentile were clearly aware of
their involvement in the Platinum arbitration and Hedges' appearance as a witness.”
The judge concluded
that Dassenko and Gentile’s simultaneous service as arbitrators in the Scandinavian arbitration and the Platinum arbitration
constituted a material conflict of interest. The judge observed that it was “unclear” if Dassenko and Gentile
“purposely concealed their involvement in the Platinum Bda Arbitration,” but decided that she “need not
decide whether Dassenko and Gentile acted maliciously in order to vacate the Scandinavian Re award.”
“By
participating in both the Scandinavian arbitration and the Platinum arbitration, Dassenko and Gentile placed themselves in
a position where they could receive ex parte information about the kind of reinsurance business at issue in the Scandinavian
arbitration, be influenced by recent credibility determinations they made as a result of Hedges' testimony in the Platinum
arbitration, and influence each other's thinking on issues relevant to the Scandinavian arbitration,” Judge Scheindlin
explained. “By failing to disclose their participation in the Platinum arbitration, Dassenko and Gentile deprived Scandinavian
of an opportunity to object to their service on both arbitration panels and/or adjust their arbitration strategy. Dassenko
and Gentile's failure to disclose their participation in the Platinum arbitration and their recent consideration of Hedges'
testimony is not excused even if they believed in good faith that they would not be influenced by the information they learned
during the course of the Platinum arbitration.”
Scandinavian is represented by Mitchell P. Hurley of Akin
Gump Strauss Hauer & Feld in New York.
St. Paul is represented by John F. Finnegan of
Chadbourne & Parke in New York. |
|
