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CERTAIN UNDERWRITERS AT LLOYD'S, LONDON v. BCS INS. CO.

January 6, 2003

CERTAIN UNDERWRITERS AT LLOYD'S, LONDON WHO PARTICIPATED IN SYNDICATES 47, 219, 227, 376, 490, 506, 529, 590, 672, 727, 807, 923, 947, 991, 994, 1003, 1027, 2003, 2027, 2227, 2376, 2490, 2506, 2591, 2923, AND 2947 AND UNIONAMERICA INSURANCE COMPANY, LIMITED, PETITIONERS
v.
BCS INSURANCE COMPANY, RESPONDENT.



The opinion of the court was delivered by: Ruben Castillo, United States District Judge

MEMORANDUM OPINION AND ORDER

RELEVANT FACTS

This dispute arises out of a series of reinsurance agreements between BCS and Reinsurers.*fn1 Under the agreements, Reinsurers provided BCS with coverage for 100% of the risk of certain warranty contracts administered by Insurance Specialists, Inc. ("ISI"). Reinsurers allege that because BCS failed to oversee ISI, which improperly administered the warranty program, the fund intended to cover all the claims was exhausted, leading Reinsurers to pay out millions of dollars. Eventually, Reinsurers stopped payment under the agreements when they allegedly discovered that BCS made misrepresentations in obtaining the reinsurance coverage. Reinsurers argued that the reinsurance agreements should be rescinded or that BCS alone should be responsible for ISI's maladministration, and demanded arbitration. BCS sought to resolve the dispute in Missouri state court, but this Court compelled arbitration on March 29, 2001, in accordance with the parties' agreement.*fn2 (R. 11, Mar. 29, 2001 Order.)

On April 15, 2002, the parties began an eight-day hearing in Chicago, Illinois before a three-person panel of arbitrators with extensive experience in the reinsurance industry. Testimony addressed both the Reinsurers' rescission claim as well as their maladministration claims. Reinsurers offered the testimony of accountant Richard Larry Johnson to support their maladministration claims; BCS did not call an expert witness to respond to Johnson's testimony. On the fourth day of the hearing, the Panel denied the Reinsurers' request for recission. Thus, at the close of the hearing, the Panel had only to decide the maladministration claims. The Panel requested post-hearing briefing on issues including "the question of ISI and whose agent ISI was." (R. 27, Pet'rs. Mem., Ex. C, Hr'g Tr. at 2059.) In their post-hearing brief, Reinsurers discussed the law of agency with reference to the Restatement (Second) of Agency, caselaw from Indiana, New Jersey, Illinois and the United Kingdom as well as industry custom. (R. 27, Pet'rs. Mem., Ex. B, Post-Hr'g Br. at 4-5, 10-22.) BCS too discussed the law of agency in its post-hearing brief, citing general propositions of law, the Restatement, caselaw from Tennessee, Oregon and other states as well as appealing to "business fairness." (R. 23, Ex. 5, Post-Hr'g Br. at 13-22.)

On June 27, 2002, the panel issued its decision, which in relevant part, denied Reinsurers' recission claim and granted Reinsurers' request for damages related to ISI's payment of uncovered claims, unreported claims, late reported claims, unreported premiums and lost investment income in the amount of $4,816,769.00. The panel noted that its decision "reflects the panel's evaluation of the relative responsibilities of the parties for the problems resulting from the Reinsurance Agreements." (R. 18, Pet. to Confirm, Ex. D, Decision, ¶ 5.) The panel retained jurisdiction "to resolve future disputes relating to the Reinsurance Agreements." (Id. at ¶ 8.) Currently before the Court are Reinsurers' petition to confirm the arbitration award and BCS' motion to vacate portions of the award.

LEGAL STANDARDS

Because not all parties to this dispute are United States citizens, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("Convention"), implemented at Chapter 2 of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 201-208, applies to the instant dispute. See lain v. Mere, 51 F.3d 686, 689 (7th Cir. 1995). Pursuant to the Convention's implementing legislation, the reviewing court should confirm the arbitration award unless one of the grounds for refusal or deferral of recognition specified in Article V of the Convention is present. 9 U.S.C. § 207. In particular, Article V (1)(e) provides that an award should not be confirmed if it has been set aside under the law of the country where the award was made. Thus, the Convention allows for vacation of the award under domestic law, in this case the FAA.*fn3 See Yusuf Ahmed Alghamm & Sons, W.L.L. v. Toys "R" Us, Inc., 126 F.3d 15, 20-23 (2d Cir. 1997); Lander Co. v. MMP Invs., Inc., 107 F.3d 476, 478 (7th Cir. 1997).

Under section 10 of the FAA, the reviewing court may vacate an award "where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made." 9 U.S.C. § 10(a)(4). Yet, the traditional presumption is that a "mere ambiguity in the opinion accompanying an award, which permits the inference that the arbitrator may have exceeded his authority, is not a reason for refusing to enforce the award." Geneva Secs., Inc. v. Johnson, 138 F.3d 688, 692 (7th Cir. 1998) (citing United Steelworkers of Am. v. Enter. Wheel & Car Corp., 363 U.S. 593, 598 (1960)). In short, this Court's scope of review of the panel's decision is "grudgingly narrow." Eljer Mfg., Inc. v. Kowin Dev. Corp., 14 F.3d 1250, 1253 (7th Cir. 1994).

Throughout their briefs and when it appears to favor their argument, both parties also cite sections of the Illinois International Commercial Arbitration Act ("IICAA"). The IICAA, based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, became effective in 1998. See 710 ILCS 30/1-1 et seq. It covers international commercial arbitrations like the present one that are held in Illinois and subject to an agreement between the United States and another country. 710 ILCS 30/1-5. Even though federal law is not meant to exclusively govern arbitration, see Volt Info. Scis., Inc. v. Bd. of Trs. of Stanford Univ., 489 U.S. 468, 477 (1989), the Illinois General Assembly altered or disregarded the UNCITRAL Model Law to make it conform with federal arbitration law. See Illinois Enacts International Commercial Arbitration Act, 10 World Arb. & Mediation Rep. 4 (Jan. 1999). Thus, the IICAA is essentially a gap-filling law.

ANALYSIS

BCS seeks to vacate paragraphs five and eight of the panel's decision under § 10(a)(4) of the FAA. 9 U.S.C. § 10(a)(4). BCS argues that paragraph five awarding over $4,000,000.00 in damages to Reinsurers should be vacated because: (1) it is an indefinite award incapable of enforcement; (2) the award was based on a damages opinion inadmissible under Illinois law; and (3) the panel exceeded its authority by making a "rough justice" compromise and not adhering to Illinois contract law. Reinsurers in turn respond that: (1) the award is a definite one based on the claims submitted to the panel; (2) under Illinois law the panel had the power to admit any evidence; and (3) the panel did not make a compromise decision, and BCS waived its right to argue for the application of the "strict rule of law." 710 ILCS 30/25-5(c). BCS also seeks to vacate paragraph eight, in which the panel retained jurisdiction over future disputes relating to the Reinsurance Agreements.

First, BCS argues that the monetary award to Reinsurers in paragraph five is indefinite because Reinsurers have ongoing contractual payment obligations to BCS against which the award should be offset. As such, BCS urges the Court to view the award in paragraph five as a credit against the $2 million that Reinsurers allegedly owe BCS, and not as a lump sum payable to Reinsurers. This Court, however, can only vacate an award on the grounds of indefiniteness if it is not sufficiently clear and specific enough to be enforced. IDS Life Ins. Co. v. Royal Alliance Assocs., 266 F.3d 645, 650 (7th 2001). In other words, we must find that the arbitrators "left unresolved a portion of the parties' dispute." Id. at 651.

BCS' claim of indefiniteness fails because the panel's decision resolved the claims submitted to the panel. Reinsurers and BCS' post-hearing briefs clearly set out the relief requested by each party. Specifically relevant to the instant dispute, BCS requested that the panel reiterate its denial of Reinsurers' recission claim and grant or deny Reinsurers' damages claims based on ISI's maladministration; Reinsurers' requested specific damages amounts for ISI's maladministration. The panel's resulting decision addressed the concerns enumerated by the parties, denying the recission claim and delineating the parameters of the coverage under the Reinsurance Agreements, as well as awarding Reinsurers over $4 million for ISI's maladministration. In short, the monetary award clearly resolved the parties' dispute over ISI's maladministration, and the remainder of the panel's decision made clear that the Reinsurance Agreements remain in effect subject to the limitations in the decision. Trusting that the parties will abide by the decision ...


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