1st Circuit is “Honorably Engaged” by Reinsurance Arbitration Award

In First State Insurance Co. v. National Casualty Co., No. 14-1644, 2015 WL 1263147 (1st Cir. Mar. 20, 2015) the U.S. Court of Appeals for the First Circuit addressed a motion to vacate an arbitration award related to multiple reinsurance and retrocessional agreements. The decision was the court’s first to address the operation and effect of a so-called “honorable engagement” provision in an arbitration clause.

The case arose out of multiple agreements between First State Insurance Company and New England Reinsurance Corporation (collectively “First State”) and National Casualty Company. The entities entered into a number of reinsurance and retrocessional agreements. Ultimately, arbitration was demanded under eight of the agreements for disputes over billing and interpretation of claims payment provisions. A three arbitrator panel interpreted the contract and established a payment protocol under the agreements.

National argued that the arbitrators exceed the scope of their authority. The First Circuit disagreed. In its opening, the court’s decision noted that vacating an arbitration award is an “uphill climb” and review is “among the narrowest known in the law.” Because the protocol outlined by the trial court followed the relevant contract provisions, the First Circuit found no issue with the award. It stated “[w]hether the arbitrators were correct either in their interpretation of the underlying agreements or in their implementation of a particular payment protocol is not within [the court’s] purview.” Instead, a comparison of the protocol to the agreements’ text showed the arbitrators “arguably” construed the agreements.

The court went on to note that an “honorable engagement” provision adds a further level of restraint on the court. Such provisions empower arbitrators “to grant forms of relief, such as equitable remedies, not explicitly mentioned in the underlying agreement.” This gives arbitrators more flexibility to custom-tailor remedies and “measurably enhances” the prospects for a successful arbitration. According to the court, the provision here allowed the grant of equitable remedies, such as the reservation of rights procedure outlined in the protocol.

 

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