In a recent decision originating from the United States District Court for the Southern District of New York, on remand from the Second Circuit Court of Appeals, the court held that (i) there was no basis for finding that joint liquidators for a Bermuda insurer were deficient or engaged in any misconduct, or that their actions resulted in any prejudice to reinsurer Commercial Union and (ii) that vacating the underlying arbitration award and granting injunctive relief would confer an undeserved benefit on Commercial Union. Commercial Union Insurance Company v. David E.W.Lines, et al., 02 Civ. 0573 (TPG). A copy of the court’s decision can be found here.

In Phase I of the underlying arbitration, reinsurer Commercial Union argued that it was damaged by the deceitful redomestication of Electric Mutual Liability Insurance Company (“EMLICO”) from Massachusetts to Bermuda. The arbitration panel unanimously ruled that while EMLICO had deceived the Massachusetts Insurance Commissioner and the Bermuda authorities about its solvency during the redomestication, Commercial Union was “no worse off in Bermuda than in Massachusetts,” and denied Commercial Union’s request to rescind the reinsurance contracts. Commercial Union commenced a federal lawsuit in Massachusetts seeking to vacate the Phase I award that denied its claim for rescission and to enjoin any further arbitration proceedings. The District Court confirmed the Phase I award and denied the injunctive relief. Commercial Union appealed.

On appeal, the Second Circuit Court of Appeals vacated the District Court’s Order and remanded for further proceedings. The Court of Appeals required the trial court to address the following questions:

  1. Was Commercial Union prejudiced by the deceitful redomestication?
  2. Could the liquidation in Bermuda affect the results of the arbitration?
  3. Did the liquidation in Bermuda affect the results of the arbitration?

In addressing these issues, the court noted that the precise issue of prejudice “necessarily relates to the performance of the Joint Liquidators,” who handled EMLICO’s insolvency in Bermuda. The court noted that the change resulting from the redomestication was that the Joint Liquidators took over EMLICO rather than the Massachusetts Insurance Commissioner. The court found that there was no complaint about the role of the Joint Liquidators during Phase I, nor was there any claim of impropriety, or that they did anything to prejudice Commercial Union in that phase.

Rather, the court found that Commercial Union’s claim of prejudice relates to Phase II, and that the claims deal with events that predate the arbitration. Commercial Union alleges that General Electric (“GE”) (EMLICO’s major client) and EMLICO colluded by changing the handling of coverage issues, entering into an Asbestos Claims Handling Agreement, and redomesticating EMLICO. The court held that it had no authority to make rulings or grant remedies with regard to allegations of wrongdoing before the arbitration began and before the redomestication occurred, which were specifically reserved for the arbitration. The court noted that the allegations of collusion were relevant only as circumstantial evidence of improper prejudicial conduct in the arbitration.

The court then focused on the conduct of the Joint Liquidators in Phase II. The court noted that the Joint Liquidators assumed EMLICO’s fiduciary duties owed to its reinsurers and GE. The court found that this meant the Joint Liquidators were in the middle and could not automatically follow the positions taken by Commercial Union or GE, as they were obligated to consider the interests of both. The Joint Liquidators were then obligated to make their decision based on the evidence and the law.

The court noted that GE never intended to or did not control the Joint Liquidators, nor did they allow themselves to be controlled. The court found that the Joint Liquidators arrived at their positions on issues “after a thoroughly conscientious analysis and were well grounded in fact and law.” The court further found no basis for finding that the Joint Liquidators were deficient or engaged in any misconduct, or that their actions resulted in any prejudice to Commercial Union. The court held that the redomestication did not deprive Commercial Union of any substantial advantages which it would have gained in Massachusetts.

The court also noted that the arbitrators took the deceit into account when awarding only $5 million in interest against Commercial Union, when the request was $15.6 million. The court confirmed the Phase I and II arbitration awards finding that the “arbitrators dealt with the issue of deceit in a wise and equitable manner,” and that vacating the award and granting injunctive relief would confer an undeserved benefit on Commercial Union by allowing them to avoid their contractual obligations as EMLICO’s reinsurer.