National Casualty Company v. First State Insurance Group

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by Michael T. Walsh, Esq., Jennifer A. Dowd, Esq.

Date Promulgated: December 2, 2005

Issue Addressed: Whether an arbitration award should be vacated where the prevailing party refused to comply with the arbitrators’ order to produce certain documents relevant to the arbitration.

The First Circuit Court of Appeals in National Casualty Company v. First State Insurance Group, 430 F.3d 492 (1st Cir. 2005), upheld a refusal to vacate an arbitration award that was granted despite the cedent’s refusal to produce documents relevant to the arbitration.

National Casualty served as reinsurer to First State on several of First State’s insurance policies covering asbestos non-product liability claims. First State settled a number of contested claims under the underlying insurance policies and ceded those payments to National Casualty as a single occurrence. National Casualty then compelled arbitration against First State regarding whether First State’s cede on a singe occurrence basis was appropriate.

During the arbitration, National Casualty requested that First State provide it with documents detailing First State’s internal legal assessment of the claims which would presumably reveal the basis on which First State had settled the underlying claims. The panel ordered First State to produce the documents, and warned that the panel may draw negative inferences if First State failed to do so. First State refused to produce the documents, claiming attorney-client privilege and attorney work product protection.

After the panel denied National Casualty’s request to delay the hearing in order to permit the parties to brief the issue of the prejudicial effect of withholding the documents, National Casualty filed a claim in the U.S. District Court for the District of Massachusetts seeking to enjoin further arbitration proceedings. The panel ruled in First State’s favor while that claim was pending. National Casualty amended its Complaint in the District Court case, seeking to overturn the panel’s award, arguing that First State’s refusal to follow the panel’s production order constituted a breach of contract which voided the arbitration clause and terminated the panel’s jurisdiction. The District Court denied the motion to vacate and National Casualty appealed.

The First Circuit Court of Appeals upheld the District Court’s decision, finding that the panel’s failed attempt to compel production from First State did not prejudice Northern Casualty and thus, did not amount to a “refusal to hear evidence” under the FAA so as to warrant misconduct-based vacatur. The Court noted that under section 10(a)(3) of the FAA, “[v]acatur is appropriate only when the exclusion of relevant evidence ‘so affects the rights of a party that it may be said that he was deprived of a fair hearing.’” See Hoteles Condado Beach v. Union De Tronquistas Local 901, 763 F.2d 34 (1st Cir. 1985).

The Court looked to the reinsurance contract and determined that it relieved the arbitrators of the “strict rules of law” and released them from “all judicial formalities.” The Court found that the panel’s drawing of an inference against First State in this case offset any unfairness to National Casualty, and that the procedural device of offering First State the choice between production and a negative inference was well within the discretion afforded to the panel by the parties under the FAA. The Court also found that National Casualty’s argument that the panel could not have decided in First State’s favor if it did, in fact, draw a negative inference was without merit.

Furthermore, the Court held that the question of whether First State’s failure to comply with the arbitration panel’s production order constituted a breach of contract and thus terminated the panel’s jurisdiction was a procedural matter. In the Court’s view, National Casualty was seeking “a court hearing on the effect of another arbitrating party’s selection among procedural options [production or negative inference] offered by an arbitrator, during a discovery dispute, in the course of an arbitration both parties agreed to enter.” In the absence of express contractual terms to the contrary, courts have jurisdiction to decide the validity and scope of the arbitration clause, and arbitrators have jurisdiction over all matters within the scope of a valid clause.First Options of Chicago v. Kaplan, 514 U.S. 938 (1995). Therefore, under the terms of the reinsurance contract and in accordance with the intent of the FAA, the Court held that it was precluded from deciding this procedural matter. See Marie v. Allied Home Mortgage Corp., 402 F.3d 1 (1st Cir. 2005).

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* Michael T. Walsh is a member of the firm of Boundas Skarzynski Walsh & Black, LLC, resident in the New York office. Mr. Walsh concentrates his practice on reinsurance and insurance arbitration and litigation. He has represented ceding companies and reinsurers in arbitration and litigation involving most major reinsurance issues.

Jennifer A. Dowd is also a member of Boundas Skarzynski Walsh & Black, LLC, also resident in the New York office. She specializes in reinsurance and insurance litigation and arbitration and professional liability insurance coverage.