A session at the recent AIDA Reinsurance & Insurance Arbitration Society (“ARIAS”) meeting addressed the enforcement of awards of pre-hearing security in arbitrations. Like most practicing reinsurance attorneys, I have obtained interim arbitration awards requiring an opposing reinsurer to post pre-hearing security and have had those awards judicially confirmed. The question discussed at ARIAS focused on potential remedies if the reinsurer does not post the collateral.
Courts generally do not award pre-judgment security in litigation. See Grupo Mexicano de Dessarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999); Credit Agricole Indosuez v. Rossiyskiy Kredit Bank, 708 N.Y.S.2d 26 (N.Y. 2000). A plaintiff seeking pre-judgment security is relegated to its remedy at law, i.e. garnishment or attachment. Pre-judgment attachments or garnishments typically require exigent circumstances and the posting of a bond to protect the debtor.
Some states authorize a court to require an unlicensed reinsurer to post collateral as a condition to answering a complaint. See N.Y. Ins. Law § 1213; Wis. Stat. Ann. § 618.47. The New York statute has been held to satisfy due process and to apply to reinsurers. See British Int’l Ind. Co. Ltd. v. Seguros La Republica, 212 F.3d 138 (2nd Cir. 2000); Curiale v. Andra Ins. Co., 88 N.Y.S.2d 268 (N.Y. 1996). If the unauthorized insurer or reinsurer does not post the bond, the trial court may strike its pleading and enter a default. Andra, 88 N.Y.S.2d at 279. The “basic allegations of liability” are admitted, but “the plaintiff’s conclusions as to damages” are not. Id.
An arbitration panel generally is authorized to award pre-hearing security, even where applicable state law would not require, or even authorize, pre-hearing security. Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255 (2nd Cir. 2003); Yasuda Fire & Marine Ins. Co. of Europe, Ltd. v. Continental Cas. Co., 37 F.3d 345 (9th Cir. 1994); Sperry Int’l Trade, Inc. v. Gov’t of Israel, 689 F.2d 301, 306 (2nd Cir. 1982); compare PMA Cap. Ins. Co. v. Platinum Underwriters Bermuda Ltd., 659 F.Supp.2d 631 (E.D. Pa. 2009) (arbitration panel exceeded authority in requiring reinsurer to post collateral), aff’d 400 Fed.Appx. 654 (3rd Cir. 2010); Recyclers Ins. Group, Ltd. v. Ins. Co. of N.A., Misc. No. 91-503, 1992 WL 150662 (E.D.Pa. June 15, 1992) (same). At least one court allowed an arbitration panel to direct the reinsurer to make interim payments directly to the cedant, rather than place them into the record as security. Certain Underwriters at Lloyd’s London v. Argonaut Ins. Co., 264 F.Supp.2d 926, 937-939 (N.D.Cal. 2003).
Some arbitration clauses incorporate the rules of an arbitration administrator such as the American Arbitration Association. The rules of that administrator may allow pre-hearing security. See American Arbitration Association International Resolution Procedures, art. 21. Otherwise, a court may infer authorization from a broad arbitration clause using terms such as “any dispute arising out of this agreement,” the panel is “relieved of all judicial formalities” and the agreement is an “honorable engagement.” Banco de Seguros, 344 F.3d at 258; On Time, 784 F.Supp.2d at 454.
A decision by an arbitrator to award pre-hearing security is immediately reviewable by a court. British Ins. Co. of Cayman v. Water Street Ins. Co, 93 F.Supp.2d 506, 514 (S.D.N.Y. 2000); see also Zeiler v. Deitsch, 500 F.3d 157, 169 (2nd Cir. 2007); Metalgesellschaft AG v. M/V Capital Constanta, 790 F.2d 280, 283 (2d Cir. 1986). The reviewing court will focus upon whether the arbitrator exceeded his or her contractual authority under the arbitration agreement. See On Time Staffing LLC v. Nat’l Union Fire Ins., 784 F.Supp.2d 450 (S.D.N.Y. 2011); compare Argonaut, 264 F.Supp.2d at 942-943 (arbitration panel lacked authority to order the reinsurer to pay the cedant a daily amount as punishment for non-compliance with an order for interim payments).
If the court confirms an award of pre-hearing security, the question is how it may be enforced. During the ARIAS program, some suggested that the panel refuse to proceed. Of course, that would reward the reinsurer. C.f. SH Tankers Ltd. v. Koch Shipping Inc., No. 12-Civ.-00375, 2012 WL 2357314 (S.D.N.Y. June 19, 2012) (arbitration stayed at request of respondent/counterclaimant where initial claimant (respondent in counterclaim) failed to post pre-award security for counterclaim). Others suggested the entry of a monetary award favorable to the cedant for the full amount sought. That might seem unduly punitive in that it would trigger an automatic judgment on the merits when the reinsurer may have a great case on the merits but limited surplus or cash. While not dispositive of an arbitrator’s authority, courts have limited the effect of an unauthorized insurer’s refusal to post a bond to an admission of liability or, perhaps, the facts underlying allegations of liability with damages remaining for consideration. See Andra, 88 N.Y.S.2d at 279.
At least one court has entered a decree of civil contempt to coerce a defendant to post pre-hearing security ordered by an arbitrator. CE Int’l Resources Holdings LLC v. S.A. Minerals Ltd. Partnership, No. 12 Civ. 8087, 2013 WL 324061 (S.D.N.Y. Jan. 24, 2013) (decree entered fining respondent refusing to post security and authorizing his incarceration). An award of civil contempt is bittersweet, since the fines could go to the government rather than to the cedant. Id.; compare Fox v. Capital Co., 299 U.S. 105, 107-108 (1936) (civil remedial contempt may order payment to aggrieved party). While penury is a potential defense to contempt, the allegedly penurious party must prove that compliance is “factually impossible.” See Badgley v. Santacroce, 800 F.2d 33, 36 (2nd Cir. 1986); Blue Sympathy Shipping Co. v. Seriocean Int’l, S.A., No. 94 Civ. 2323, 1994 WL 597144, *2 (S.D.N.Y. July 6, 1994).
Finally, the cedant might seek the entry of a monetary judgment. See Hyosung (America) Inc. v. Tranax Technologies, Inc., No. 3:10-CV-0793 (N.D.Cal. May 25, 2010) (entry of judgment on interim arbitration award). If the reinsurer did not post any bond required for an appeal, the cedant then could seek to enforce the judgment through levy, post-judgment garnishment or post-judgment attachment. Of course, levy, garnishment and attachment carry special liability risks for the collecting party.
