Opinion
Civil Action No. 04-1419.
June 15, 2004
MEMORANDUM
Plaintiffs LDG Re and Members of Workers Compensation Alternative Facility 1 (collectively "LDG") have moved to vacate and/or modify an arbitration award on the ground that one of the matters on which the arbitrators ruled had not been properly submitted to them for decision. See 9 U.S.C. § 11(b). Defendant Reliance Insurance Co. ("Reliance") has moved to confirm the award in the amount of $50,789,316.86.
For ease of reference, we will refer to the members of the arbitration panel as arbitrators even though one of them is called an umpire.
It is the role of the court to determine whether a party has submitted an issue for arbitration because arbitrators only have authority to decide matters actually submitted to them for resolution. Matteson v. Ryder Sys., Inc., 99 F.3d 108, 112-13 (3d Cir. 1996). However, deference is accorded to arbitrators on the question of what issues have been submitted in the same way that deference is accorded them on issues of interpretation of the underlying contract. Id.
In order to understand the dispute before the court, it is necessary to explain in some detail the underlying contract in issue. On April 1, 1997, the parties entered into a written agreement known as the Quota Share Reinsurance Treaty ("Treaty") covering the period April 1, 1997 through September 30, 1999. Under the Treaty, LDG reinsured 100% of certain workers' compensation insurance written by Reliance. Thus, LDG was required to reimburse Reliance for the latter's payments for workers' compensation claims under its insurance policies. In return, Reliance was obligated to tender to LDG the premiums it charged its insureds, less commissions.
The Treaty set forth the procedures for monthly reports and remittances by Reliance and for netting the monthly amounts either due by or due to Reliance. Generally, if the written premiums less commissions exceeded the insurance losses for a particular month, Reliance would remit the difference to LDG. If insurance losses suffered by Reliance in any month were greater than the written premiums less commissions, LDG was required to forward the difference to Reliance.
As originally written, the netting process required Reliance to give LDG credit for the full written premium for each month even though the premiums were being collected over time or were uncollected.
On October 15, 1999, the parties entered into a letter agreement, which all have conceded modified the Treaty. This letter, written by Keith Kaplan, Executive Vice President of Reliance, and agreed to by John Kane representing LDG, provided that "You [LDG] have agreed to follow our fortunes where we take write-offs for uncollectible amounts." In other words, from that point on, the credits in favor of LDG no longer included premiums uncollected or uncollectible by Reliance. This change benefited Reliance since it would now receive from LDG the amount representing the insured workers' compensation losses minus only collected premiums less commissions rather than the amount representing those losses minus the full written premiums less commissions. As noted above, full written premiums meant the premiums charged without regard to whether they had been collected from the entity buying the workers' compensation insurance from Reliance.
The parties have used the words uncollectible anduncollected synonymously.
Sometime after October 15, 1999, in order to resolve certain disputes and to facilitate LDG's overdue payments, Reliance and LDG entered into an oral agreement in which Reliance agreed that $10 million in uncollected premiums would be reintroduced into the credit and debit formula. Accordingly, LDG's obligation to reimburse Reliance for insurance losses it paid was reduced by the $10 million less any commissions. Because LDG allegedly reneged on its obligation to make payments to Reliance under the Treaty, Reliance maintained that it was entitled to credit for the uncollected premiums in accordance with the "follow our fortunes" language in the October 15, 1999 letter written by Keith Kaplan and acknowledged by John Kane.
Article XXI of the Treaty provided that "[a]ny and all disputes . . . arising out of, relating to, or concerning this Agreement . . . will be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire. . . . The arbitration will be conducted under the Federal Arbitration Act. . . ." The arbitration provision of the Treaty also stated, "The notice requesting arbitration will state in particulars all issues to be resolved in the view of the claimant. . . . Within thirty (30) days of receipt of the claimant's notice, the respondent will notify the claimant of any additional issues to be resolved in the arbitration."
In its December 20, 2002 notice requesting arbitration, Reliance stated:
Reliance Insurance Company (In Liquidation) hereby demands consolidated arbitration against the Members of the WC Alt Pool managed by LDG Re for their respective share of amounts past due and owing in connection with the ISA Program under the Quota Share Contracts. At the present time, the outstanding amount due from Subscribing Reinsurers is $25,172,000.27. Reliance will also seek additional and further damages with respect to the ISA Program, as appropriate. These will include (among other items of damages) interest, attorneys' fees, expenses and extra-contractual damages.
The issue in the arbitration is whether Subscribing Reinsurers have any legitimate or principled basis to withhold payment to Reliance.
The arbitration hearing was held in Philadelphia over a year later in February, 2004. Testimony and exhibits were introduced, briefs filed, and arguments made. On February 25, the panel of arbitrators, acting unanimously, handed down an award in favor of Reliance and against LDG in the amount of $42,228,165.80 in damages, $1,923,789.77 in interest, and a refund of uncollected premiums previously credited by Reliance to LDG in the amount of $6,637,361.29, for a total of $50,789,316.86. The award also imposed on LDG a continuing obligation to pay Reliance certain sums when they become due.
LDG does not contest the award except for the $6,637,361.29 in uncollected premium credits. It contends that the issue of refund of uncollected premiums credited to LDG by Reliance was not submitted to the arbitrators for decision in Reliance's December 20, 2002 notice as required under the Treaty. It seeks to have the arbitration award reduced by this amount under the Federal Arbitration Act which authorizes a court to "make an order modifying or correcting the award . . . where the arbitrators have awarded upon a matter not submitted to them." 9 U.S.C. § 11(b).
Reliance counters that it submitted the refund issue when it included language in its December 20, 2002 notice demanding from plaintiffs "their respective share of amounts past due and owing in connection with the ISA [Insurance Service of America] Program under the [Treaty]." Reliance also relies on other statements in the notice: (1) "Reliance will also seek additional and further damages with respect to the ISA Program, as appropriate," and (2) "The issue in the arbitration is whether Subscribing Reinsurers have any legitimate or principled basis to withhold payment to Reliance."
In its March 31, 2003 Organization Statement prepared at the direction of the arbitration panel, Reliance concluded with a paragraph entitled "Specific Relief Sought." Reliance stated:
Reliance respectfully requests that this Panel require LDG to pay Reliance the current outstanding balance of $25,565,536.58 under the Quota Share Contracts. In addition, Reliance requests that the Panel award interest from the date it determines that the amounts due Reliance should have been paid, the costs of this arbitration, including Reliance's attorney's fees, as well as additional damages as the Panel deems to be appropriate.
As of the December 20, 2002 notice by Reliance requesting arbitration, the current outstanding balance was $25,172,000.27. It is undisputed that the amount of $25,565,536.58 subsequently grew to $42,228,165.80.
Again, the Opening Brief of Petitioner Reliance Insurance Co. (In Liquidation) explained that "Reliance seeks the unpaid balances due under the 1997 and 1998 Treaties. The brief also made reference to the letter agreement between LDG and Reliance and deposition testimony concerning the treatment of uncollected premiums under the Treaty.
During the arbitration hearing in February, 2004, evidence was introduced relating to uncollected premiums, including the October 15, 1999 letter agreement between LDG and Reliance on the subject of uncollected premiums. In that letter, as noted above, LDG agreed "to follow [Reliance's] fortunes where we [Reliance] take write-offs for uncollectible amounts." Keith Kaplan, Executive Vice President of Reliance, also testified about this issue. Furthermore, Reliance's counsel referred explicitly in closing argument before the arbitrators to the claim for credit for uncollected premiums in the amount of $6.6 million. Reliance, as its counsel had stated at the closing argument, then forwarded to the arbitrators a proposed award which included the specific figure of $6,637,361.29 for this element of damage. This number represented the $10 million credit to LDG in uncollected premiums from which were deducted the commissions and expenses in the percentages specified under Article XI A and B of the Treaty. It was Reliance's position that the credit was no longer applicable because of LDG's contractual breaches. Thus, there can be no doubt that Reliance placed before the arbitrators its claim for refund of the net uncollected premiums. The panel did not decide the issue sua sponte.
While LDG's motion to vacate and/or modify the arbitration award is predicated on the failure of Reliance to submit the refund issue to the bitrators, LDG also makes the argument that it did not receive fair notice of the issue. It is true that Reliance's December 20, 2002 notice of arbitration did not include words such as "refund of uncollected premiums." However, it clearly stated it was demanding "amounts past due and owing in connection with the ISA program under the Quota Share Contracts [Treaty]." It made explicit that the amount set forth was the amount owing "at the present time." The notice went on to say, "The issue in the arbitration is whether Subscribing Reinsurers have any legitimate or principled basis to withhold payment to Reliance." The total sum due Reliance under the Treaty, including any amount owed as a result of a no longer valid credit given to LDG for uncollected premiums, was fairly encompassed within the notice. Indeed, it makes little sense to read the notice to carve out from arbitration an integral part of the claimed indebtedness of LDG to Reliance, particularly when Reliance was in liquidation and attempting to wrap up its affairs once and for all.
In any event, LDG was not unaware that the issue of premium credits was before the arbitrators. In its April 4, 2003 Reinsurer's Statement of Issues, it stated, "Finally, as reflected in the Reliance Liquidator's suit against ISA, there clearly are significant issues as to whether Reinsurers have been paid the premium they are due and whether they have been properly billed for claims." Again, in Respondents' Pre-hearing Brief dated February 4, 2004, plaintiffs stated "an adjustment of nearly $3 million in Reinsurers' favor would be required to account for: a. [l]osses attributable to policies written after the termination of the Treaty; and b. [p]remiums written by ISA during the Treaty period for which Reinsurers were not paid their share."
Significantly, LDG did not object to any lack of specificity in Reliance's December 20, 2002 notice of arbitration and did not seek further clarification as to what Reliance had in mind. LDG does not dispute that Reliance produced in discovery information related to uncollected premiums. The issue of refunds for uncollected premiums came up in the documentary evidence and in the testimony of Keith Kaplan at the hearing. The sum of $6.6 million and what it represented was specifically raised in post-hearing argument by counsel for Reliance. The exact figure of $6,637,361.29 was included in the proposed "Interim Final Order" submitted by Reliance to the arbitrators for consideration and also e-mailed or faxed to opposing counsel. As noted above, certain of LDG's filings with the arbitrators make it clear that it was aware that the issue of premiums was very much a part of the arbitration. Had LDG believed Reliance was going beyond the issues of which it had proper notice, it should have objected in a timely manner before the arbitration panel. It cannot wait until an adverse award is handed down to do so. Wellman v. Writers Guild of Am., W., Inc., 146 F.3d 666, 673 (9th Cir. 1998).
According to the statements of counsel at oral argument, counsel transmitted their respective proposed orders to each other at the close of business on Monday, February 23, 2004. The arbitrators handed down their award on Wednesday, February 25, 2004.
LDG makes much of the fact that Reliance submitted to the arbitrators with its Opening Brief of Petitioner Reliance Insurance Company (in Liquidation) an exhibit which set forth that as of December, 2003 the amount due and owing from LDG was $42,228,165.80. However, Reliance put LDG on notice that this was not a final number. In footnote three on page two of its brief, it states, "As losses continue to be reported to Reliance from the state Guaranty Association, Reliance will provide updated billings to LDG on the ISA Program." Further, Reliance alerted LDG that the $42 million was not the upper limit of its claim. At page thirty of its brief it stated under the heading "Damages," that "Reliance seeks the unpaid balances due under the 1997 and 1998 Treaties. In addition, Reliance also seeks an additional award of damages." (emphasis added). This language mirrors what it had said in its initial December 20, 2002 notice of arbitration. There it announced, "Reliance will also seek additional and further damages with respect to the ISA Program, as appropriate."
To the extent LDG is merely complaining about the amount of damages awarded or whether it was entitled to a credit for uncollected premiums under the contract documents, those matters are beyond our power to change. Such issues were matters clearly within the purview of the arbitrators. Nor will this court read into the Federal Arbitration Act detailed pleading rules which if violated will be the basis to overturn an arbitration award.Executone Info. Sys., Inc. v. Davis, 26 F.3d 1314, 1322 (5th Cir. 1994).
Finally, there is no due process violation. Even if the notice of arbitration was insufficient, LDG waived any challenge to it.See Wellman, 146 F.3d at 673. This case is distinguishable from Totem Marine Tug Barge, Inc. v. North American Towing, Inc., 607 F.2d 649 (5th Cir. 1979), upon which LDG relies. There both sides conceded that the arbitrators had decided an issue not submitted to them. In fact, the arbitrators obtained the damage figure through an ex parte conversation with counsel for one of the parties after the hearing had concluded. The opposing party never had a chance to object or to be heard.
In sum, the issue involving the credits for uncollected premiums was clearly submitted to the arbitrators. Reliance sought "the amounts past due and owing in connection with the ISA Program under the Quota Share Contracts." It declared at the outset in its December 20, 2002 notice requesting arbitration that "the issue in the arbitration is whether Subscribing Reinsurers have any legitimate or principled basis to withhold payments to Reliance." Whether or not credits were due to Reliance for uncollected premiums was very much a part of the arbitration. The matter was raised in testimony at the hearing and in post-hearing argument. LDG had ample opportunity to seek clarification or to object on the ground of unfair notice before the arbitrators decided the matter. It did not do so.
Our review is not de novo. Based on the required deference to the arbitrators, we will deny the motion of LDG to vacate and/or modify the award and will grant the motion of Reliance to confirm the award in the amount of $50,789,316.86.
ORDER
AND NOW, this day of June, 2004, for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that:(1) the motion of plaintiffs LDG Re and Members of Workers Compensation Alternative Facility 1 to vacate and/or modify the arbitration award is DENIED;
(2) the motion of defendant Reliance Insurance Co. (In Liquidation) to confirm the February 25, 2004 arbitration award is GRANTED; and
(3) judgment is entered in favor of Reliance Insurance Co. (In Liquidation) and against LDG Re and Members of Workers Compensation Alternative Facility 1 in the amount of $50,789,316.86.