Ace American Ins. Co. v. Christiana Ins., LLC

Issue Discussed: Judicial Review/Manifest Disregard

Submitted by Daniel M. Perry, Aluyah I. Imoisili

Date Promulgated: April 12, 2012

Issues Decided: Confirmation of an arbitration award

In Ace American Insurance Company v. Christiana Insurance, LLC, the court confirmed an arbitration award in favor of Ace American. The court held that a heavy burden of proof applies to a party asking a court to review an arbitration decision and that all of Christiana’s arguments failed to meet this burden.

Background

Christiana Insurance LLC provided Dupont with a first party insurance policy covering property damage and business interruption during the 2008-2009 policy year. Christiana reinsured this policy with Ace American Insurance Company for up to $500 million, with a $200 million deductible.

In September 2008, Hurricane Ike caused substantial property damage and shut down business operations at DuPont’s Texas facilities. Ace initially paid $50 million to Christiana based on Christiana’s representation that the total claim would exceed $250 million. The $50 million payment took into account the $200 million deductible. Subsequently, the parties were unable to resolve the valuation of the losses and arbitration ensued.

Christiana claimed that there were $411 million in covered losses, and thus sought $161 million after accounting for the $200 million deductible and Ace’s previous $50 million payment. Ace counterclaimed, seeking to recover the $50 million payment it had made on the grounds that there was insufficient proof that losses exceeded the $200 million deductible. After an eight-day arbitration hearing, on November 3, 2011, the arbitration panel unanimously decided that it was unable to resolve the dispute because both parties failed to sustain their respective burdens of proof—Christiana failed to prove that the losses exceeded $250 million, and Ace failed to prove that the amount of the losses was less than $250 million.

Christiana filed a motion for clarification and/or reconsideration before the panel. The panel issued another unanimous decision explaining that it was no longer empowered to hear any requests to reconsider the award since it was functus offficio. The panel also reiterated that Christiana “had received all the compensation it was entitled to receive until it established that its loss exceeded $250 million.” Ace then filed an amended petition to confirm the arbitration award. Christiana opposed this petition and filed a cross-petition to vacate the arbitration award.

Holding

Christiana argued that that it was entitled to vacatur of the arbitration award under sections 10(a)(3) and 10(a)(4) of the Federal Arbitration Act (FAA) as well as under the Second Circuit’s “manifest disregard” doctrine. Christiana argued that the panel refused to hear material evidence on the parties’ prior course of dealings. FAA section 10(a)(3) provides that a court may vacate an arbitration award if “the arbitrators were guilty of misconduct . . . in refusing to hear evidence pertinent and material to the controversy; or of any other misconduct by which the rights of the party have been prejudiced.” Christiana also argued that the panel “exceeded their powers” under FAA section 10(a)(4) by failing to specify and apply a proper burden of proof standard. Christiana additionally argued that the award was in “manifest disregard of the law” because the panel failed to construe the contract against the drafter (Ace) and ignored case law relevant to determining the appropriate burden of proof in evaluating its “business interruption” claims.

The court rejected all of Christiana’s challenges and confirmed the award. The court reasoned that Christiana failed to establish that there was fundamental unfairness in the arbitration proceedings under FAA section 10(a)(3), because the panel gave Christiana an adequate opportunity to argue that the prior course of dealing evidence should be admitted. Regarding FAA section 10(a)(4), the court held that the panel acted within the scope of their authority even if the panel had applied the wrong burden of proof. And, the court held that the panel did not manifestly disregard the law because Christiana did not show that the panel was required to construe the contract against the drafters or apply any particular burden of proof with respect to proof of damages, or that the panel went beyond its authority in the parties’ contract.

*Daniel M. Perry is a partner and Aluyah I. Imoisili is an associate in the law firm of Milbank, Tweed, Hadley & McCloy LLP.