In re Arbitration Between Northwestern National Insurance Company and Generali Mexico Compania de Seguros, S.A.

Issue Discussed: Security

Submitted by Michael T. Carolan, Thomas J. Kinney*

Date Promulgated: May 1, 2000

In re Arbitration Between Northwestern National Insurance Company and Generali Mexico Compania de Seguros, S.A., No. 00 CIV. 1135 (NRB), 2000 WL 520638 (May 1, 2000)

Court: U.S. District Court for the Southern District of New York

Issue Decided: Whether an arbitration panel’s interim order requiring respondent to place pre-hearing security in escrow was fundamentally unfair.

In In re Arbitration Between Northwestern National Insurance Company and Generali Mexico Compania de Seguros, S.A., the U.S. District Court for the Southern District of New York confirmed an arbitration panel’s interim award requiring a reinsurer to pay the disputed amount plus arbitrator fees into an escrow account pending the final hearing, holding that the process employed by the panel in making its order was not fundamentally unfair.

The Arbitration

In 1976, Bellefonte Insurance Company, the predecessor to Northwestern National Insurance Company (“Northwestern”) and Anglo Mexican de Seguros S.A., the predecessor to Generali Mexico Compania de Seguros S.A. (“Generali”) entered into a “Quota Share Retrocession Agreement.”  Twenty-two years later, Northwestern demanded arbitration concerning unpaid losses.  In the demand, Northwestern notified Generali that it would seek pre-hearing security in the amount of all incurred losses.

Consistent with its demand, Northwestern’s position statement asked the Panel to require Generali to post pre-hearing security of $240,266.69.  Just prior to the organizational meeting, the parties reached an agreement, pursuant to which, among other things, Generali was required to place $23,570.39 into an escrow account “as security for its obligations” under the reinsurance agreement.  At Generali’s request, the organizational meeting was postponed several times, before eventually being held on December 21, 1999.  At the organizational meeting, Generali disclosed that it was having difficulty establishing the escrow agreement.

On January 10, 2000, following several rounds of contentious letters between counsel for the parties, the Panel issued a formal interim security order, directing that both parties establish escrow accounts for their portion of the arbitrators’ fees, and that Generali establish an escrow account in the amount of $213,750.39 as security for Northwestern’s claims.  In a subsequent letter, the Panel then slightly modified the order.  When Generali failed again to create an escrow account consistent with the Panel’s orders, on January 24, 2000, the Panel issued an order finding Generali to be in default and liable to Northwestern on the merits for an amount to be determined at a later hearing.  Following the damages hearing on February 3, 2000, the Panel issued its Interim Award and Order, finding Generali’s liability under the reinsurance agreement to be $198,162.28.  The Panel further ordered that Generali pay the arbitrator fees and provide a schedule for commencement of a second hearing regarding liability for attorneys’ fees.

Generali moved to vacate the Panel’s interim award in the U.S. District Court for the Southern District of New York.

The District Court Opinion

With respect to the question of pre-hearing security, Generali asserted that the Panel’s process robbed it of the “fundamental fairness” guaranteed by the Federal Arbitration Act.

The District Court disagreed.  While acknowledging the general principle cited by Generali, the court held: “We cannot find, as a matter of law, that it was wrong for the panel to order the security on its own terms once it became clear that the parties could not or would not agree upon terms.”  In reaching that conclusion, the court noted that other courts in the Second Circuit “have firmly established the principle that arbitrators have the authority to order interim relief in order to prevent their final award from becoming meaningless.”

The court further found that “[t]he amount of the [pre-hearing security] order did not prejudice Generali because Generali had agreed to the amount and the amount was readily available” according to Generali’s counsel.

Finally, the court noted that despite Generali’s refusal to comply with the Panel’s orders, “the panel still allowed Generali the opportunity” to submit evidence it believed would reduce the alleged balances due under the reinsurance agreement.  Thus, the court found that the process employed by the Panel was fair and that any prejudice suffered by Generali was due to its own refusal to submit any evidence at the substantive hearing.

* Michael T. Carolan and Thomas J. Kinney are partner and associate, respectively, in the Insurance & Reinsurance group of Crowell & Moring LLP.  They each represent cedents and reinsurers in disputes involving a broad spectrum of issues.