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March 18, 2010
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    March 31 - Webinar
     
    Insurance Brokerage - M&A Review and Outlook
     
    Description:
    Join us for a one hour free webinar with one of the nations' leading authorities and experts on Mergers & Acquisitions, Hales & Company.  This informative and timely webinar will provide you with 2009 results as well as current trends in insurance brokerage M&A that will impact the market for both buyers and sellers.
     
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    M&A REVIEW AND OUTLOOK FOR THE FUTURE
     
    M&A activity in 2009 was one of the least active by number of deals in the last 10 years. We will discuss prior year results and current trends that will impact the overall insurance brokerage/agency M&A market for buyers and sellers.
     
    TRANSACTION MULTIPLES, EARN OUTS AND DEAL STRUCTURE
     
    Whether interested in buying or selling, participants will come away with an understanding of current trends in transaction pricing and structuring.  Understanding the "truths from the myths" in valuations and deal structures is half the battle in today's M&A marketplace
     
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    Wednesday March 31st, 2010 at 4:00 PM EST
     
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    Click below to register and to get a reminder email before the webinar starts:
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    www.agentsofamerica.org/newsletters/hales_seminar.pdf

     
    The Growing Authority of Arbitrators Under the Federal Arbitration Act
    By Brian R. Biggie

    In the world of reinsurance, agreements, or Treaties, the inclusion of provisions mandating arbitration is a well-established industry standard. Despite the potential exposure inherent in reinsurance disputes, such Treaties and their corresponding arbitration provisions are not particularly expansive and, in fact, oftentimes rely upon "boiler plate" language.

    In light of the costs, delays and rigid strictures imposed upon litigants venued in Federal Court, a contracting party's incentive to grant an arbitrator the authority to resolve a dispute is readily apparent. However, given the well established, and arguably growing, deference Federal Courts afford an arbitrator, parties must not forego caution and foresight when agreeing to arbitrate any resulting dispute. As evidenced by a recent Second Circuit decision, an arbitrator granted broad authority under an arbitration agreement may choose to exercise that authority in a manner unexpected by the parties.

     

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    Arbitration As a Preferred Method of ResolutionArbitration As a Arbitration As a Preferred Method of Resolution

    Courts have repeatedly afforded great deference to the determinations made by arbitrator and endorse, in many cases, the authority of an arbitrator to resolve substantive and procedural issues. For example, in Employer's Ins. Co. of Wausau v. Century Indem. Co., 443 F.3d 573 (7th Cir. 2006), Wausau agreed to act as a reinsurer to Century under two separate reinsurance "Agreements" covering different "layers" of liability. Upon payment of a series of bodily injury claims, Century sought reimbursement from its reinsurers. After being denied payment by a number of reinsurers, including Wausau, Century demanded that these reinsurers participate in a consolidated arbitration. Wausau filed suit seeking a declaration that it was entitled to separate arbitration proceedings under the two agreements, and that such proceeding must be independent of any arbitration between Century and its remaining reinsurers.

     

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    The court noted that generally procedural questions arising out of a dispute are presumptively for an arbitrator to decide. Accordingly, since the consolidation question concerned an issue of procedure, "i.e. whether Century can be required to participate in one arbitration covering both the Agreements, or in an arbitration with other reinsurers," it remained for the arbitrator to decide. Id. at 577.

    In National Cas. Co. v. First State Ins. Group, 430 F.3d 492 (1st Cir. 2005), National Casualty served as a reinsurer for First State on a number of insurance obligations. First State settled a series of claims and sought reimbursement from National Casualty. National Casualty suspected that First State had misrepresented the basis on which the underlying claims had been settled in order to maximize the amount of potential reimbursement. The arbitration agreement stated, in part, "they [arbitrators] are relieved of all judicial formalities and may abstain from following the strict rules of law." Id. at 495. During arbitration, National Casualty requested that First State provide certain documents regarding First State's legal assessment of the claims for which it was requesting reimbursement.

     

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    The panel of arbitrators ordered First State to produce the requested documents, warning that if it failed to do so, the panel would draw whatever negative inferences it deemed appropriate. First State refused to provide the documents stating that they were protected under the attorney-client privilege. In turn, National Casualty requested that the arbitrators delay the hearing in order to give the parties time to brief the effect of withholding the documents. The panel denied this request and ruled in favor of First State.

    National Casualty instituted a federal action seeking an Order vacating the decision of the panel based upon its refusal to compel First State to disclose the requested documents. National Casualty asserted, in part, that the panel's refusal to hear pertinent and material evidence constituted "misconduct." The court disagreed, noting that the agreement between the parties was broad in scope and relieved the arbitrators of any obligation to follow the "strict rules of law" and released the arbitrators from "all judicial formality." Id. at 497. In holding that National Casualty did not meet its burden to support vacating the panel's decision, the court stated:
    In the face of a clause that broad, which makes no mention of the production obligations of the parties or of the discovery procedures to be followed, and which so fully signs over to the arbitrators the power to run the dispute resolution process unrestrained by the strict bounds of law or of judicial process, a party will have great difficulty indeed making the showing, requisite to vacatur, that their rights were prejudiced. Id. at 497-98.

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    The court concluded that the panel's decision to offer a party the choice between producing documents or a resulting negative inference, was well within the discretion granted by the parties under the agreement and the Federal Arbitration Act.

    Against this back drop of great deference to arbitrators the recent decision by the Second Circuit may appear both expected, and surprising at the same time. In ReliaStar Life Ins. Co. of New York v. EMC National Life Co., 564 F.3d 81 (2nd Cir. 2009), National Travelers and ReliaStar entered into two separate unrelated co-insurance agreements. The agreements contained identical provisions and provided for mandatory arbitration of any resulting disputes. The arbitration clause stated, in part:

    10.1 Appointment of Arbitrators. In the event of any disputes or differences arising hereafter between the parties with reference to any transaction under or relating in any way to this Agreement as to which agreement between the parties hereto cannot be reached, the same shall be decided by arbitration. Three arbitrators shall decide any dispute or difference. . .

    10.2 Decision. The arbitrators shall consider customary and standard practices in the life or health reinsurance business, as applicable to the dispute. They shall decide by a majority vote of the arbitrators. There shall be no appeal from their written decision. Judgment may be entered on the decision of the arbitrators by any court having jurisdiction. Id.

    The agreement also addressed the issue of costs and attorneys fees arising out of an arbitration, stating:

    10.3 Expenses of Arbitration. Each party shall bear the expense of its own arbitrator (whether selected by that party, or by the other party pursuant to the procedures set out in Section 10.1) and related outside attorneys' fees, and shall jointly and equally bear with the other party the expenses of the third arbitrator. Id.

    As a result of various disputes, National Travelers initiated arbitration proceedings seeking a declaration that the co-insurance agreements had been terminated, and approval for a proposed terminal accounting. Following a two-week hearing, the arbitration panel entered an award finding the co-insurance agreements remained in force and directing National Travelers to pay ReliaStar more then $21 Million pursuant to the terms of the agreements.

    In addition, the panel, without explanation, awarded ReliaStar attorneys fees and costs. After further briefing on this issue, the arbitration panel affirmed its prior determination and entered a final award in favor of ReliaStar requiring National Travelers to remit over $3.5 Million in fees and costs. The panel viewed the conduct of National Travelers in the course of the arbitration as lacking good faith.

    Subsequently, ReliaStar petitioned the district court to affirm the arbitration award. National Travelers filed a counter-petition seeking a declaration vacating the award to the extent it granted ReliaStar fees and costs. The district court agreed with National Travelers and vacated the part of the award requiring National Travelers to pay ReliaStar's attorney and arbitrator fees.

    On appeal, the Second Circuit noted that while Section 10(a)(4) of the Federal Arbitration Act allowed courts to vacate an arbitration award where the arbitrators exceeded their powers, this principle has been consistently interpreted narrowly. The court construed the question before it as whether the arbitrators' award drew its "essence" from the agreement to arbitrate, stating:

    Applying principle to this case, we consider only whether in light of the parties' agreement to arbitrate, the arbitrators were authorized to sanction bad faith conduct by awarding attorney's and arbitrator's fees. Id.

    The court expressly stated that it was not deciding whether the arbitrators correctly identified what constituted bad faith or whether the stated amount of fees was appropriate.

    The Second Circuit held that where an arbitration clause is broad, arbitrators have the discretion to order such remedies as they deem appropriate. In applying this principle, the court concluded that the broad language contained in Section 10.1 of the co-insurance agreement conferred "inherent authority" on the arbitrators to sanction a party that participates in the arbitration in bad faith, and that such a sanction may include an award of attorney's or arbitrator's fees. The court went on to observe:

    Indeed, the underlying purpose of arbitration, i.e., efficient and swift resolution of disputes without protracted litigation, could not be achieved but for good faith arbitration by the parties. Consequently, sanctions, including attorneys' fees, are appropriately viewed as a remedy within an arbitrators' authority to effect the goals of arbitration. Id.

    In upholding the assignment of sanctions, the court rejected the proposition that Section 10.3, which stated that the parties would bear their own costs, precluded an award of sanctions. While this provision specifically stated that attorney's fees and costs are to be borne by the respective parties, the Second Circuit concluded that nothing in the provision signaled the party's intent to limit the arbitrators' "inherent authority" to sanction based on participation in the arbitration, stating:

    Accordingly, we have no basis for thinking that the parties to this agreement ever considered the question of whether to limit the arbitrators' authority to sanction bad faith conduct. In contrast, they did expressly confer comprehensive arbitral authority in section 10.1. In light of that conferral, we conclude that Section 10.3 is properly construed to reflect the parties' agreement that the arbitrators may not factor attorney's or arbitrator's fees into awards that result from the parties' expected good faith arbitration of a dispute. The section does not signal the parties' intent to limit the conferral of comprehensive authority by precluding an award of attorney's or arbitrator's fees when a party's bad faith dealings create a recognized exception to the American Rule. Id.

    In the end, the Second Circuit upheld the award of attorneys' fees and costs to ReliaStar. Notably, Section 10.1 as quoted by the court in its decision, does not reference authority to levy fees and costs on any party. Despite this, the court simply viewed the language as broad enough to grant the arbitrators' authority to sanction a party. In fact, the court viewed this authority as "inherent" based upon the language of the agreement. The authority to assign sanctions was not a function of an express provision, but an inherent ability based simply upon the arguably generic terms of the arbitration provision. Moreover, the court dismissed the impact of the portion of the agreement that actually referenced fees and costs. Despite the fact that the agreement specifically stated that fees would be borne by each party, the court essentially viewed the lack of an express limitation on the arbitrators' ability to sanction as an implicit recognition of the arbitrators' option to levy costs and fees based upon bad faith.

    This decision was not without dissent. Judge Pooler criticized the result stating, in part:

    Specifically, the arbitral award could not properly include an award of attorneys' fees to Reliastar, even if that award was based upon the arbitral panel's reasonable conclusion that EMC should be sanctioned for bad faith conduct during the arbitration proceedings, because the contract between Reliastar and EMC divested the arbitral panel of any authority to make an award of attorney's fees. Id.

    Based upon the majority's rationale, any arbitration agreement with language akin to that used in the ReliaStar agreement arguably vests arbitrators with "inherent authority" to levy sanctions based on a determination of bad faith. Given that the language employed in the ReliaStar agreement is not starkly different from the typical language used in most arbitration provisions, it is to be expected that parties actively involved in an arbitration, or those contemplating arbitration, could use the ReliaStar decision to seek sanctions based upon an allegation of bad faith.

    As a result of the ReliaStar decision, parties entering an arbitration agreement must give careful thought to the scope of authority granted and take steps to expressly limit such authority as to reflect the intention of the parties.
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