• Pennsylvania Federal District Court Vacates Arbitration Award, Finding Honorable Engagement Clause Did Not Authorize Panel to Re-Write Contract
  • September 30, 2009 | Author: John R. Vales
  • Law Firm: Riker Danzig Scherer, Hyland & Perretti LLP - Morristown Office
  • In PMA Capital Insurance Co. v. Platinum Underwriters Bermuda, Ltd., No. 09-84, 2009 U.S. Dist. LEXIS 85046 (E.D.Pa.Sept. 17, 2009) (Diamond, J.), the U.S. District Court for the Eastern District of Pennsylvania granted a petition filed by PMA to vacate an arbitration award on grounds that the award exceeded the arbitrators' powers. The one-page award in the arbitration proceeding eliminated a "deficit carry forward" provision in the parties' reinsurance contract, and required PMA to make a one-time payment to Platinum of $6 million to apparently compensate it for the loss of this provision. A deficit carry forward provision allows a reinsurer to carry forward a loss it may have incurred in one year to offset a positive balance in a reinsured's "experience" account in a subsequent year.

    In vacating the award, the Court significantly rejected the position that the presence of an Honorable Engagement Clause in the parties' reinsurance contract gave the arbitrators the authority to eliminate the deficit carry forward provision of the contract. The Court succinctly stated, "No court has held that such a clause gives arbitrators authority to re-write the contract they are charged with interpreting."

    In light of the limited scope of review given to arbitral awards under the Federal Arbitration Act, the Court's decision in PMA Capital should lend support to petitions by insurers and reinsurers alike who seek to vacate arbitration awards that re-write, ignore or eliminate material terms of contracts the subject of arbitration.