Harper Ins. Ltd. v. Century Indem. Co.

Issue Discussed: Honorable Engagement Clause

Submitted by Elizabeth V. Kniffen, Dennis Anderson

Date Promulgated: July 28, 2011

Harper Ins. Ltd. v. Century Indem. Co., 819 F.Supp.2d 270 (2011)

Court: United States District Court for the Southern District of New York

Issues Decided: Can an arbitration panel order a remedy – specifically a prepayment plan – that was not explicitly stated in the contract?

In Harper Insurance Limited v. Century Indemnity Company, the United States District Court for the Southern District of New York denied a petition by a group of reinsurers to vacate an arbitration award, and granted the insurer’s cross-petition to confirm the award, based in part on its conclusion that an honorable engagement clause permitted the arbitrators to fashion a prepayment plan that was not included in the contract.

The petitioner reinsurers (“Reinsurers”) were parties to a reinsurance contract (the “Agreement”) with Century (“Century”) that obligated Reinsurers to indemnify Century for certain levels of liability arising out of asbestos bodily-injury lawsuits. The contract did not include a Reports and Remittances clause dictating when claims would be compensated by Reinsurers. Instead, the contract directed that the “liability of the Reinsurers shall follow that of [Century] in every case” and “payments of claims . . . in which this reinsurance is involved shall be binding upon the Reinsurers, who shall be bound to pay or allow, as the case may be, their proportion of such payment.”

The contract also included a broad arbitration clause providing that arbitrators “shall interpret this Agreement as an honorable engagement and shall make their award with a view to effecting the general purpose of this Agreement in a reasonable manner, rather than in accordance with a literal interpretation of the language.”

In the early 2000s, insurers and reinsurers were threatened with bankruptcy when they experienced a flood of asbestos bodily-injury claims. The Reinsurers instituted a program requiring Century to meet heightened documentation requirements before receiving indemnification. Those requirements led to a bottleneck in Reinsurers’ payments for asbestos claims, and Century initiated arbitration to resolve it. A complex arbitration process led to an interim arbitration by which the arbitrators (“the Panel”) created a prepayment program requiring Reinsurers to pay, within 106 days of delivery of a billing, “the entire amount billed or the undisputed portion plus 75 percent of the disputed portion . . . .”

For over three years the Panel’s plan worked smoothly, and the prepayment provision was never triggered. Reinsurers and Century agreed that the Panel’s jurisdiction should be terminated, and Reinsurers asked that a final order be issued that eliminated the prepayment provision. The Panel issued a final order terminating its jurisdiction, but left the prepayment provision in place.

Reinsurers petitioned to vacate the final order, arguing that the Panel exceeded its powers by re-writing the Agreement to include a prepayment provision the parties had not bargained for.

The court denied the petition, holding that the Panel did not exceed the scope of its authority, even though the prepayment plan included obligations not explicitly bargained for by the parties. The court noted that the Agreement’s honorable engagement clause specifically directed the Panel not to interpret the contract literally, but to carry out the contract’s “general purpose . . . in a reasonable manner.”

The court quoted a 2003 case in which the U.S. Court of Appeals for the Second Circuit observed that “[c]ourts have read [honorable engagement] clauses generously, consistently finding that arbitrators have wide discretion to order remedies they deem appropriate,” and stated that courts reviewing decisions made by arbitrators operating under honorable engagement clauses are to determine “whether the award draws its essence from the agreement to arbitrate or has a barely colorable justification.”

The court also pointed out that, even though the contract did not include a Reports and Remittances clause dictating the timing of payments, it clearly sought to ensure a prompt flow of funds to cover claims. “The Panel ultimately concluded that this [prepayment] protocol best effectuated the parties’ purpose,” the court said. “We cannot conclude that [the Panel] did not have, at a minimum, a barely colorable justification for its decision.”