Michigan Mut. Ins. Co. v. Unigard Sec. Ins. Co.

• Decision Date: 08 February 1995
• Docket Number: No. 92-36804,92-36804
• Citation: 44 F.3d 826
• Parties: MICHIGAN MUTUAL INSURANCE COMPANY; American Hardware Mutual Insurance Company; Prudential LMI Commercial Insurance Company, Plaintiffs-Appellees, v. UNIGARD SECURITY INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 826

44 F.3d 826

MICHIGAN MUTUAL INSURANCE COMPANY; American Hardware Mutual Insurance Company; Prudential LMI Commercial Insurance Company, Plaintiffs-Appellees, v. UNIGARD SECURITY INSURANCE COMPANY, Defendant-Appellant.

No. 92-36804.

United States Court of Appeals Ninth Circuit.

Argued and Submitted April 5, 1994.

Decided Jan. 11, 1995.

As Amended Feb. 8, 1995.

Stephen D. Holz, Musick, Peeler & Garrett, Los Angeles, CA, for defendant-appellant.

Michael R. Hassan, Lord, Bissell & Brook, Chicago, IL, for plaintiffs-appellees.

Appeal from the United States District Court for the Western District of Washington.

Before: TANG, BOOCHEVER, and REINHARDT, Circuit Judges.

Opinion by Judge BOOCHEVER.

Dissent by Judge REINHARDT.

BOOCHEVER, Circuit Judge:

Unigard Security Insurance Company ("Unigard") appeals the district court order confirming an arbitration award entered in proceedings between it and appellees, Michigan Mutual Insurance Company, et al. ("Retrocessionaires"). Unigard claims that the part of the award setting forth conditions precedent to the Retrocessionaires' obligation to reimburse Unigard should be vacated because the arbitration panel exceeded its authority and imposed conditions that do not draw their essence from the parties' contract. Unigard also asks us to vacate as irrational and in "manifest disregard of the law" the panel's decision to remove any obligation of Retrocessionaires to pay on certain future claims. We affirm.

BACKGROUND

Unigard was a reinsurer of primary insurance companies. Reinsurance occurs "when one insurer (the 'ceding insurer' or 'reinsured') 'cedes' all or part of the risk it underwrites, pursuant to a policy or group of policies, to another insurer" (the "reinsurer"). Unigard Sec. Ins. Co. v. North River Ins. Co., 4 F.3d 1049, 1053 (2d Cir.1993). The reinsurer indemnifies the ceding insurer on the risk transferred, thereby diversifying the risk of loss. Id. A "retrocession" occurs when a reinsurer in turn cedes to yet another reinsurer a portion of the exposure insured. Robert H. Jerry, Understanding Insurance Law, Sec. 140[a], pp. 683-84 (1987). The second reinsurer is then known as a "retrocessionaire." Id.

When Unigard decided to leave the reinsurance business, it entered into a contract with the Retrocessionaires whereby the Retrocessionaires reinsured 100% of Unigard's net retained liability under hundreds of reinsurance contracts. The agreement between Unigard and the Retrocessionaires is known as the Quota Share Retrocessional Contract ("QS contract").

Various disputes arose between Unigard and Retrocessionaires over the terms and interpretation of the QS contract. Pursuant to an arbitration clause in the QS contract, the parties submitted the disputes to binding arbitration. ¹ The panel issued an award, which Unigard contests in part.

The first dispute before us involves reinsurance coverage that Unigard had procured for itself prior to its agreement with Retrocessionaires, under an agreement called the Intere Casualty Retrocessional Excess of Loss Reinsurance Agreement ("INCARE"). Under this agreement, when a claim was submitted to Unigard, Unigard would cover the first $100,000 in losses, then INCARE would cover the next $900,000 in losses. When Retrocessionaires reinsured Unigard, it assumed Unigard's liability under contracts reinsured by INCARE. It thus appears that Retrocessionaires reinsured Unigard for its liability to pay the first $100,000 of a claim covered by INCARE, its contingent liability to pay the next $900,000 in the event INCARE did not pay, ² and any excess liability.

The QS contract between Unigard and Retrocessionaires did not address whether Unigard or Retrocessionaires would initially pay (i.e. "front" the money) on claims ultimately covered by INCARE. Because there was often a delay in obtaining reimbursement from INCARE, a dispute arose concerning which party was obligated to front the payments. This issue was submitted to the arbitrators along with another disputed point under the INCARE contracts: the question of which party would bear the risk in case of INCARE's insolvency. In Decision Statement 3 of the panel's award, the panel decided that Unigard was obligated to front the payments, but that Retrocessionaires would bear the risk of INCARE's insolvency and would therefore be obligated to reimburse Unigard for fronted payments under certain conditions.

According to the decision, the conditions precedent to Unigard's reimbursement by Retrocessionaires for INCARE claims were that "[Unigard shall] consult with [Retrocessionaires], and obtain [Retrocessionaires'] agreement as to the applicability of the underlying primary policy coverage, and as to [Unigard's] and [Retrocessionaires'] liability therefor, and as to the proposed payment amount, for any loss which [Unigard] proposes to pay that is subject to the quota share treaty." Unigard challenges the imposition of these conditions precedent.

The second dispute before us involves five Unigard reinsurance contracts with International Surplus Lines Insurance Company ("INSLIC"). Unigard reinsured INSLIC and was then itself reinsured for its INSLIC obligations by Retrocessionaires, under the QS contract. Initially, Retrocessionaires routinely paid claims submitted to them by Unigard under the INSLIC contracts. Then Retrocessionaires learned that Unigard had been involved in a dispute with INSLIC, had stopped payments to INSLIC for a period of time, and ultimately had engaged in arbitration proceedings with INSLIC. The result of that arbitration was an agreement by Unigard to pay INSLIC $1.5 million, which Unigard submitted to Retrocessionaires as a claim covered by the QS contract.

Retrocessionaires sought an explanation of Unigard's dispute with INSLIC and information about the Unigard/INSLIC arbitration proceedings, because that dispute might have an effect on Retrocessionaires' liability under the INSLIC contracts. Unigard refused to provide requested information about its reasons for stopping payment to INSLIC or about the issues and claims made in the Unigard/INSLIC arbitration proceedings. Retrocessionaires therefore sought to rescind their acceptance of the INSLIC contracts. Conversely, Unigard sought an order declaring Retrocessionaires' continuing obligation to pay for INSLIC claims and ordering Retrocessionaires to pay the existing $1.5 million claim owed by Unigard to INSLIC.

At the Unigard/Retrocessionaires arbitration hearing, the panel requested from Unigard the information about its interactions with INSLIC, because of the effect the desired information could have on the validity of the QS contract. The panel even extended the hearing for possible admission of the information. Unigard declined to provide any further materials.

The panel found that Unigard was in breach of the QS contract with respect to the INSLIC contracts. Because information about the disputes between Unigard and INSLIC might be relevant to Retrocessionaires' obligation to reimburse Unigard, Unigard's failure to provide relevant information concerning that obligation violated the duty Unigard owed to Retrocessionaires to act in good faith. ³ The panel concluded that the lack of information prevented it from determining whether the QS contract should be rescinded as to the INSLIC contracts. It nonetheless sought to provide an appropriate remedy for Unigard's breach of contract. Decision Statement 6(c) states:

The Board ... DIRECTS AND ORDERS that [Retrocessionaires] shall be relieved of [their] retrocessional obligation to [Unigard] with respect to any and all other INSLIC claims for which [Unigard's] obligation to pay INSLIC has arisen or might arise after the date on which the last actual payment of an INSLIC retrocessional claim was made by [Retrocessionaires].

The panel further explained that it would not grant Unigard's request for an order that Retrocessionaires were obligated to continue paying claims made under INSLIC, stating

that any award that would affirm an obligation of [Retrocessionaires] to pay part or all of the current specific retrocessional loss amounts claimed by [Unigard] or any other and future potential INSLIC retrocessional losses that have yet to be claimed would ... constitute a species of pecuniary harm to [Retrocessionaires], and which harm would be as a direct result of [Unigard's] breach of express and implied conditions precedent.

Unigard and Retrocessionaires interpret the panel's award as terminating Retrocessionaires' future liability for INSLIC claims. Unigard challenges this portion of the award as irrational and in manifest disregard of the law because this relief is, in practical effect, better than the rescission that the panel found it lacked the information to grant. (Had the contract been rescinded, Retrocessionaires would have had to return large premium payments to Unigard.)

Retrocessionaires filed a petition in the district court for an order confirming the arbitration award and Unigard raised its objections to the award. The district court confirmed the award, finding that no part of the award was in manifest disregard of the law. We review the district court's confirmation of an arbitration award de novo. Employers Ins. of Wausau v. National Union Fire Ins. Co., 933 F.2d 1481, 1485 (9th Cir.1991).

DISCUSSION

I. The INCARE Award

Unigard asks us to vacate Decision Statement 3(b)(4), which sets forth the conditions precedent to Unigard's reimbursement for payments fronted under the INCARE contracts.

A. The Scope of the Submission

Unigard first argues that the arbitration panel exceeded the scope of its authority when it imposed the conditions precedent by ruling on a matter not submitted to it.

When arbitrators rule on a matter not submitted to them, or act outside the scope of the parties' contractual agreement, the award may be overturned because the arbitrators exceeded the scope of their authority. 9 U.S.C. Sec. 10(a)...