PMA Capital Insurance Company (“PMA”) and Platinum Underwriters Bermuda, Ltd. (“Platinum”) entered into a reinsurance agreement that contained, among other things, a “deficit carry forward” provision. A dispute arose between the parties concerning the validity and scope of this provision, which was submitted to arbitration. After a full hearing on the merits, the Panel issued a one-page award in favor of Platinum, which stated that the “deficit carry forward” provision was “eliminated” from the reinsurance agreement, and ordered PMA to pay $6 million pursuant to that provision. The Panel’s Award did not state any reason or explanation for its decision.

PMA moved to vacate or, in the alternative, modify the award on the grounds that the Panel’s decision was contrary to both the relief sought by the parties in the arbitration and the plain language of the reinsurance agreement. The U.S. District Court for the Eastern District of Pennsylvania granted PMA’s motion to vacate on two bases. First, the Court found that the award was not rationally derived from the reinsurance agreement, because the Panel “wrote out” a key provision in that agreement without any explanation. The Court noted that the “honorable engagement clause” in the reinsurance agreement, though providing the Panel with broad discretion to order certain remedies they deemed appropriate, and allowing it to abstain from following the strict rules of law, did not give the Panel authority to re-write the contract.

Moreover, the Court found that the award could not be rationally derived from the parties’ submissions, because neither party asked for the Panel to eliminate the “deficit carry forward” provision, or argued that any money was currently due under that provision. Accordingly, applying the standard set forth by Section 10(a)(4) of the Federal Arbitration, the Court held that the award was “completely irrational” and should be vacated.

Click here to review the District Court’s decision, captioned PMA Capital Ins. Co., et al. v. Platinum Underwriters Bermuda, Ltd., No. 09-84 (E.D. Pa 2009).