British Ins. Co. of Cayman v. Water Street Ins. Co.
Issue Discussed: Security
Submitted by Galen P. Sallomi, Michael T. Carolan*
Date Promulgated: April 28, 2000
British Ins. Co. of Cayman v. Water Street Ins. Co., 93 F.Supp.2d 506 (S.D.N.Y. 2000)
Court: U.S. District Court for the Southern District of New York
Issues Decided: Whether an arbitration panel’s preliminary order requiring pre-hearing security without allowing oral argument must be vacated because it was either in “manifest disregard” of the law or fundamentally unfair.
In British Island Co. of Cayman v. Water Street Ins. Co., the District Court for the Southern District of New York affirmed an arbitration panel’s preliminary order requiring defendant reinsurer to post a $1.7 million security without allowing oral argument. The court held that (1) the panel’s order was not in “manifestly disregard” of the law because arbitrators have the inherent authority to order interim relief in order to prevent their final award from becoming meaningless and (2) the procedure was not fundamentally unfair because the arbitration agreement had relieved the arbitrators of all judicial formalities.
The Arbitration
In the 1980s, Water Street Insurance Company (“Water Street”) and British Insurance Company of Cayman (“BICC”) entered into several facultative reinsurance agreements. In 1997, BICC’s immediate predecessor demanded arbitration for approximately $1.56 million under the reinsurance agreements.
At the first organizational meeting, BICC asked the panel to require Water Street to post a security. At BICC’s request, the panel prospectively agreed to allow both parties to submit briefs and conduct oral argument on the issue. In its opening brief, BICC argued that Water Street should post a security to ensure that the panel’s final award would be available. In opposition, Water Street argued that no exigent circumstances or equitable factors justified ordering it to post a security. In reply, BICC presented new evidence of Water Street’s financial instability, including: (i) a letter from its vice president admitting a financial problem that potentially exposed Water Street to bankruptcy; (ii) a letter describing the winding down of operations of the New York Insurance Exchange, an entity that Water Street had argued would provide additional security; and (iii) proof of BICC’s prior unsuccessful attempts to collect payment from Water Street. Further, BICC argued that its failure to satisfy the procedural requirements of the statute authorizing a pre-hearing security, New York Insurance Law § 1213, was irrelevant because arbitrators have intrinsic authority to award pre-hearing security.
Despite the earlier commitment to provide an oral hearing, upon receipt of BICC’s reply the panel ordered Water Street to post a $1.7 million in pre-hearing security. Water Street refused, citing financial hardship and claiming that because $1.7 million represented approximately 85% of its available assets, posting the security would essentially put it out of business and provide BICC with an unwarranted preference over other claimants.
The District Court Opinion
On review, the U.S. District Court for the Southern District of New York denied Water Street’s motion to vacate the order and found, inter alia, that the panel (i) did not disregard New York law even though it failed to follow the procedural requirements of § 1213, (ii) was not required to conduct an oral hearing, and (iii) was not required to hear Water Street’s underlying defenses before ordering it to post the security.
On the first issue, the district court held that arbitrators are not bound by the procedural requirements of § 1213. In the court’s view, because the essence of arbitration is to provide a speedy and inexpensive resolution of a conflict, the Second Circuit has repeatedly held that arbitrators have broader authority than district courts to issue interim orders and require parties to post a security. The court also noted that the arbitration agreement relieved the arbitrators from all judicial formalities. Finally, the court recognized that Water Street’s history of financial and geographical maneuvers raised the specter that any final award could be rendered meaningless and concluded that the panel’s pre-hearing security order did not manifestly disregard New York law.
On the second issue, the court held that while arbitrators must grant the parties a fundamentally fair hearing, fundamental fairness neither requires arbitrators to hear all the evidence proffered by a party, nor to provide an oral hearing. Rather, arbitrators may determine whether additional evidence or argument is necessary or would simply prolong the proceedings.
On the third issue, the court refused to create a rule requiring arbitrators to conduct a full hearing on all defenses before entering interim protective orders. While the court noted that a federal court would probably abuse its discretion if it issued such a pre-hearing security order without permitting discovery or considering Water Street’s facially credible defenses, the court explained that Water Street and BICC had specifically agreed that the arbitrators would be relieved of all judicial formalities. (Notably, the court cautioned that its holding on this issue was limited to interim orders and that arbitrators must allow a full hearing on all defenses before entering a final order.)
* Galen P. Sallomi and Michael T. Carolan are associate and partner, respectively, in the Insurance & Reinsurance group of Crowell & Moring LLP. They each represent cedents and reinsurers in disputes involving a broad spectrum of issues.
