The U.S. Court of Appeals for the Third Circuit recently affirmed a District Court’s vacatur of an arbitration award because the arbitration panel exceeded its authority in ordering relief not sought by either of the parties and removing from the parties’ reinsurance agreement a material provision. See PMA Capital Ins. Co., et al. v. Platinum Underwriters Bermuda, Ltd., No. 09-3963 (3d Cir. Nov. 8, 2010).

Platinum Underwriters Bermuda, Ltd. (“Platinum”), as reinsurer, entered into a reinsurance agreement with PMA Capital Insurance Company and its affiliates (“PMA”), as the ceding company. The agreement included a “deficit carry forward provision” that entitled Platinum to reimbursement for losses carried from one year to the next. In 2008 a dispute arose between the parties concerning the scope of this provision when PMA argued that Platinum was not entitled to carry forward any losses for a specified period.

Platinum demanded arbitration, and a panel of arbitrators issued a one-page award that required PMA to pay Platinum certain amounts and eliminated the deficit carry forward provision from the reinsurance agreement, relief that was not requested by the parties. The Panel’s award did not state any reason or explanation for its decision. PMA then petitioned the U.S. District Court for the Eastern District of Pennsylvania to vacate the award, which was granted. Platinum appealed that order to the Third Circuit.

In affirming the District Court’s order, the Third Circuit held that the arbitration panel exceeded its authority under Section 10(a)(4) of the Federal Arbitration Act (“FAA”) by issuing an award that required PMA to pay Platinum and eliminated the deficit carry forward portion of the reinsurance agreement, since this relief was not sought by either party and wrote material terms out of the contract. The court found that the award was “completely irrational” and beyond the scope of the panel’s authority, despite the fact that the reinsurance agreement contained an “honorable engagement” clause that allowed the panel to stray from “judicial formalities” in rendering a decision. The court noted that the honorable engagement language had limits and did not give the panel authority to “reinvent” the contract before it.

Click here to review the Third Circuit’s decision.