Arbitrators to Decide If Reinsurance Rebilling After Final Arbitration Award Is Precluded
What happens when, after a reinsurance arbitration over how the ceding company billed the reinsurer is resolved in the reinsurer’s favor with a final award confirmed by the court, the ceding company rebills the reinsurer for the same losses (but differently than the way it did during the prior arbitration)? If the reinsurer again denies the billing, is the dispute subject to arbitration or is it precluded by the court’s judgment confirming the prior arbitration award? That is the issue addressed by a Massachusetts federal court.
In Certain Underwriters at Lloyd’s, London v. Century Indemnity Co., Nos. 18-cv-12041, 19-cv-11056, 2020 U.S. Dist. LEXIS 39242 (D. Mass. Mar. 6, 2020), a dispute arose over the billing of molestation losses. After settling with its insured, the cedent allocated all of the molestation claim payments to the policy in effect at the time of the first act of molestation as agreed in the settlement agreement and then accumulated the payments allocated to each policy period and billed them as a single loss occurrence. An arbitration resolved the initial billing dispute in favor of the reinsurer holding that the allocation under the settlement agreement was not the product of a reasonable and business-like investigation. The ceding company then rebilled the same losses, but this time spread the loss payments across each of the policies in effect during the time of the abuse and then accumulated all the payments for each policy period and billed them as a single loss occurrence.
After the first arbitration, the final award (and a clarification) was confirmed and a judgment was entered. After the rebilling, the reinsurer refused to pay based on the judgment rendered confirming the original arbitration award. The cedent demanded arbitration and moved to compel arbitration. The reinsurer moved to enforce the judgment, to enjoin the second arbitration demand, and to dismiss the petition to compel arbitration.
The court allowed the reinsurer’s motion to enforce the judgment in part, denied the motion to enjoin the second arbitration and the motion to dismiss the petition to compel arbitration. In doing so, the court addressed the preclusive nature of the first arbitration award (and judgment) and whether it was for the second arbitration to determine the preclusive effect of the first award.
As the court held, the preclusive effect of a prior arbitration on a subsequent arbitration is an arbitrable dispute. Here, said the court, the cedent was seeking to determine whether the preclusive scope of the prior arbitration decision encompassed the rebilling that was done without allocating the loss payments under the terms of the settlement agreement. Thus, the court found that the issue was not whether the ceding company was attacking the first arbitration, but whether the original arbitration award precluded arbitration of the rebilling.
The court found that nothing in the arbitration award indicated that it was intended to have a prospective effect over new billings or that it foreclosed submitting the reinsurance billings in a new format. The court stated that the arbitration award turned on the unreasonableness of the settlement agreement allocation in concluding that the billings were improper and did not address all other issues. Thus, the court held that the preclusive effect of the arbitration award was an issue for the subsequent arbitration panel to resolve.
The court applied the same principles to the reinsurer’s motion to dismiss the petition to compel the second arbitration. The court found that the cedent was an aggrieved party because there was no umpire appointed and there was an ongoing dispute between the parties regarding the appointment of the arbitrators.
There was also an issue as to how many arbitration panels should be formed. The court declined to direct the formation of multiple panels because that issue was a procedural matter for the arbitrators to decide. As the court concluded, “[i]t will be up to the arbitrator to determine whether multiple arbitration panels should be formed.”