Petitioner Global Reinsurance Corporation of America (“Global”) and its predecessor companies provided reinsurance coverage to Home Insurance Company. Global reinsured its contracts with Home by obtaining retrocessional reinsurance coverage from, among others, respondent Argonaut Insurance Company (“Argonaut”). See Global Reinsurance Corp. of America v. Argonaut Ins. Co., 2009 WL 928014 (S.D.N.Y. 2009).
In 2003, Global entered into an agreement with Home settling and commuting the parties’ reinsurance contracts, including Global’s contingent liability for incurred but not reported (“IBNR”) claims, which were based upon actuarial studies prepared by a consulting agency retained by Global. Global billed its retrocessionaires for its commutation payment, and Argonaut refused reimbursement. Global then demanded arbitration pursuant to arbitration clauses contained in its retrocessional reinsurance treaties with Argonaut (the “Treaties”).
In the arbitration, Argonaut asserted, among other things, that the IBNR prong of Global’s commutation payment to Home was not covered under the Treaties or Global’s reinsurance contracts with Home. A three-person arbitration panel rejected Argonaut’s position, noting that “virtually all loss settlements, both in insurance and reinsurance, involve compromise and include a so-called contingent component…” and that “the comprehensive nature of the commutation between [Home] and [Global] represents a distinction without a difference to the validity of a loss settlement under the Treaties.” Id. at *3. Thus, the Panel concluded that Global’s commutation payment (both the contingent and non-contingent claims) was covered under the “Loss Occurrence” provision in the Treaties, which was defined as “any one disaster, casualty accident or loss.”
Global moved to confirm the Panel’s award in the U.S. District Court for the Southern District of New York, and Argonaut cross-moved to vacate the portion of the award requiring it to indemnify Global for the IBNR claims. As part of its motion to vacate, Argonaut asserted that the Panel ignored the definition of “Loss Occurrence” in the Treaties in finding that the IBNR claims were covered. Argonaut further argued that the Panel misapplied the follow the fortunes doctrine by purportedly “expanding” coverage for such claims.
The court began its analysis by noting that its review of the Panel’s award was governed by the grounds enumerated in Sections 10 and 11 of the Federal Arbitration Act (“FAA”), as well as the judicially-created doctrine of “manifest disregard of the law.” Id. at *4 (citing Stolt-Nielson SA v. Animalfeeds Int’l Corp., 548 F.3d 85, 90 (2d Cir. 2008). Although the court recognized that other federal circuit courts have abandoned manifest disregard of the law in the wake of the U.S. Supreme Court’s decision in Hall Street Assocs. v. Mattel, Inc., 128 S. Ct. 1396, 1402 (2008), it noted that the Second Circuit continues to recognize this doctrine as a valid basis for the vacatur of arbitration awards. See Global Reinsurance Corp., 2009 WL 928014, at *4 (noting that “the principle is very narrow”).
Nonetheless, the court confirmed the Panel’s award in its entirety, finding that the Panel had sufficient grounds for concluding that the IBNR component of Global’s commutation payment was covered under the “Loss Occurrence” provision in the Treaties, particularly since the Treaties were to be construed as “honorable engagements” and “honorable undertakings” between the parties, rather than technical legal instruments. Moreover, the court held that because the Panel had a basis to find that the IBNR claims fell within the scope of coverage provided by the Treaties, the follow the fortunes doctrine applied.