Yosemite Ins. Co. v. Nationwide Mut. Ins. Co., 16 Civ. 5290, 2016 U.S. Dist. LEXIS 157061 (S.D.N.Y. Nov. 10, 2016).

In 2013, the insured state, liable for remediation costs arising out of pollution, settled with the cedent. Decades earlier, the cedent had entered into an umbrella liability excess of loss reinsurance contract with the reinsurer. After the settlement, the cedent sought recovery under the treaty for the reinsurer’s share of the settlement amount.

The reinsurer refused to pay, relying on an exclusion in the treaty for contamination and pollution. An arbitration ensued and a majority award was issued in favor of the reinsurer. Article II(1) (B) of the treaty provided that “this contract does not apply to but specifically excludes” an enumerated list of activities. Among these exclusions was one for “contamination and pollution.” The cedent had argued that the next section, article II(1)(C), which provides that the exclusions do not apply where the insured’s main operations are not excluded “hereunder,” meant that the reinsurer had to pay the loss.

At the arbitration, the umpire questioned the cedent’s reading of article II(1)(C) and suggested that the word “hereunder” referred to the sections following, rather than those preceding. The umpire supported this suggestion further by referring to the use of the word “above” in (C), thus concluding that “hereunder” did not include the preceding section listing the exclusions.

In seeking to vacate the award, the cedent made several arguments. The cedent claimed that the umpire’s failure to disclose material information created the appearance of bias requiring the award to be vacated and that the panel’s interpretation of the contract was irrational. The reinsurer crossmoved to confirm and sought attorney fees and costs.

In denying the motion to vacate the award, the court stated that the cedent’s argument that the award was irrational was really an application for vacatur under either FAA §10(a)(4) or the manifest disregard doctrine. Because the arbitration panel anchored its reasoning in inferences drawn from the treaty’s text, the court held that the award was beyond the scope of judicial review. According to the court, although the panel’s majority reading of the treaty might not be the only feasible one, the panel was well within its authority to construe the treaty as it did. Thus, the court held that the award reflected neither manifest disregard of the law nor an instance “where the arbitrators exceeded their powers.”

The cedent’s challenge to the umpire’s non-disclosure as giving rise to a “reasonable impression of partiality” was rejected by the court as well. The court found that the umpire’s failure to disclose his involvement in a proceeding between the cedent and another party did not itself establish partiality to warrant vacatur. 

Finally, the reinsurer’s request for attorney fees and costs was denied because the court found that the cedent’s petition was not frivolous.