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CERTAIN UNDERWRITERS AT LLOYD'S, LONDON v. ARGONAUT INS.

May 13, 2003

CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, HIGHLANDS INSURANCE COMPANY (UK), LTD., AND LONDON & EDINBURGH GENERAL INSURANCE COMPANY, LTD., PETITIONERS,
v.
ARGONAUT INSURANCE COMPANY, A CALIFORNIA CORPORATION, RESPONDENT.



The opinion of the court was delivered by: Edward M. Chen, United States Magistrate Judge

ORDER DENYING MOTION TO DISQUALIFY THE UMPIRE, CONFIRMING INTERIM ARBITRATION ORDER NO. 2, AND VACATING INTERIM ARBITRATION ORDER NO. 3 (Docket Nos. 5, 10, 25, 32)
This matter came on for hearing on April 22, 2003. Robert Westerfield of Bowles & Verna appeared on behalf of the Petitioners and Mitchell Orpett of Tribler Orpett & Meyer appeared on behalf of Respondent. Having considered the arguments in support of and in opposition to Petitioners' motions to disqualify George M. Gottheimer as the neutral arbitrator and to vacate interim orders No. 2 and 3, and Respondent's motions to dismiss under Rule 12(B)(6) and to dismiss or in the alternative to stay proceedings, and the argument of counsel, and good cause appearing therefor, the Court hereby denies the petition to disqualify the Umpire, confirms Interim Order No. 2, and vacates Interim Order No. 3, and denies the motions to dismiss as moot.

I. INTRODUCTION

A. Factual Background and Procedural History

Petitioners Certain Underwriters at Lloyd's, London, Highlands Insurance Company, Ltd. and London & Edinburgh General Insurance Company, Ltd. ("Certain Underwriters") seek to disqualify George Gottheimer, Jr., the neutral umpire ("Umpire") of a pending arbitration proceeding between Certain Underwriters and Argonaut Insurance Company ("Argonaut") and to vacate certain interim orders issued by the Umpire. Respondent Argonaut moves to dismiss, pursuant to Rule 12(b)(6), or to stay, until after the arbitration hearing, both of Certain Underwriters' motions.

The parties entered into certain reinsurance agreements ("the Treaty"). The pending arbitration arose from a dispute regarding coverage under the Treaty. Argonaut had submitted claims to Certain Underwriters in the approximate amount of $2.5 million for legal expenses from an underlying coverage action between Argonaut and an alleged insured. Certain Underwriters denied coverage and initiated arbitration proceedings against Argonaut on December 14, 2001. Each party appointed a party arbitrator, and these party arbitrators nominated two candidates for the umpire position. George M. Gottheimer was selected as the Umpire. The Treaty contains an arbitration clause requiring that disputes be resolved in San Francisco. Whalen Dec., Exh. A, Art. 15.

The parties and the arbitration panel held an organizational meeting on November 25, 2002. Whalen Dec., Exh. F. Prior to this meeting the parties exchanged their respective preliminary position statements, and Argonaut claimed that Certain Underwriters was obligated to pay it $2,535,491.32 for legal expenses incurred in connection with the underlying insurance coverage litigation. Argonaut contended that those expenses are covered as an "ultimate net loss," reimbursement to which it is entitled under the Treaty. Moreover, Argonaut contended it was entitled to immediate payment under the Treaty. Whalen Dec., Exh. F at 36-37. The Treaty (Art. 11) authorizes interim payments for losses.

At the meeting the Umpire asked, "There are funding requirements under the reinsurance agreement. In the absence of these funds, would Argonaut take a penalty to surplus[?]" Id. at 65. Evidently the Umpire was referring to a California insurer's annual filing requirements with the California Insurance Commissioner pursuant to Cal. Insurance Code §§ 922.22 et seq. Failure to receive payment before the end of the year has adverse implications for reporting purposes. At the organizational meeting, the arbitration panel orally issued Interim Order No. 1:

[W]e order the Petitioner to establish an escrow in the amount of $2,535,491.32 to be held by counsel for the Respondent under the control of the Panel and that the escrow be established by December 31, 2002. The form of the escrow to be mutually agreed upon by the parties and if they cannot agree on the form of the escrow, that the Panel be contacted immediately and then we will order what form will be necessary.
Whalen Dec., Exh. F, at 67. See also id. at 72 (Mr. Gottheimer stating: "We have no particular feelings one way or the other about the form of the escrow, but the agreement must state that it is under the control of the Panel because that protects everybody in the event that one of the parties became bankrupt."). The December 31, 2002 deadline was apparently set with the reporting requirements in mind.

On December 18, 2002, more than three weeks after the organizational meeting, Certain Underwriters informed Argonaut's counsel that it would be complying with Interim Order No. 1 by filing a $2.5 million dollar bond. Whalen Dec., Exh. G. The bond itself was procured on December 19 but was not sent to Argonaut's counsel until December 26, 2002. Whalen Dec., Exh. G-H.

On December 24, 2002, Argonaut's counsel e-mailed Certain Underwriters counsel expressing its view that the bond was inadequate vis-a-vis California year-end relief from penalties for uncollected reinsurance. Argonaut also filed a motion with the panel to require interim payment or posting of letter of credit by Certain Underwriters by December 31, 2002. Whalen Dec., Exh. I. That motion was served on Certain Underwriters the afternoon of Christmas eve, but Certain Underwriters' attorneys' office was closed early for the holiday. The Umpire e-mailed the parties that same afternoon and informed them that it would respond to the motion soon. Whalen Dec., Exh. J.

On December 26, 2002, the Umpire e-mailed the parties, stating that the panel was issuing Interim Order No. 2 because the parties had not been able to agree to the form of the escrow. Whalen Dec., Exh. K. Interim Order No. 2 required Certain Underwriters to "either make an interim cash payment or post a Letter of Credit in the amount of $2,535,491.32" with five conditions:

(1) It shall be clean;

(2) It shall be irrevocable and unconditional;

(3) Drawn on a bank that is acceptable to the regulatory authorities having jurisdiction over the Respondent-Cross-Petitioner's [Argonaut's] reserves;
(4) Shall be issued for a period of not less than one year, and shall automatically be extended for one year from the date of its expiration, unless sixty (60) days prior to any expiration date, the issuing bank shall notify Respondent-Cross-Petitioner by certified or registered mail that the issuing bank elects not to consider the Letter of Credit extended for an additional period;
(5) The Letter of Credit may be drawn upon at any time by sight draft, and no other documents need be presented.
Whalen Dec., Exh. K.

On December 27, 2002 counsel for Certain Underwriters e-mailed the Umpire and opposing counsel, stating that because of the Christmas holiday it had not reviewed Argonaut's motion prior to the issuance of Interim Order No. 2, to which it was now objecting. Whalen Dec., Exh. L. The Umpire responded indicating that he had not heard from Certain Underwriters between December 24 and 26, that Interim Order No. 2 was designed to allow Argonaut to avoid a penalty to surplus, and that the order would stand unless the parties could mutually agree to a suitable funding arrangement. Whalen Dec., Exh. M.

On December 30, 2002, counsel for Certain Underwriters responded to the previous e-mail by reiterating its belief that Interim Order No. 1 was designed to provide potential payment rather than actual payment to Argonaut. Certain Underwriters also objected to Interim Order No. 2, arguing that Interim Order No. 2 was in irreconcilable conflict with Interim Order No. 1, and that the arbitration panel had effectively resolved a disputed coverage issue in Argonaut's favor without a hearing on the merits and before Certain Underwriters could obtain and review the necessary files from Argonaut. Whalen Dec., Exh. N.

On December 31, 2002, the Umpire took Certain Underwriters' correspondence under advisement, acknowledging that the penalty to surplus matter "raises other issues." Whalen Dec., Exh. 0. That same day, counsel for Argonaut reiterated many of its concerns, including that Certain Underwriters was attempting to force Argonaut to accept the choice of a bond by proceeding to purchase a bond even though Argonaut had already expressed its objection that the bond did not comply with Interim Order No. 1. Whalen Dec., Exh. P. Argonaut also argued that it was ready to proceed with the file inspection, and that affording year-end relief to Argonaut was the intended purpose of Interim Order No. 1. Id.

The arbitration panel considered counsels' correspondence of December 30 and 31. Interim Order No. 2 was then modified on January 2, 2003, requiring Certain Underwriters to comply within 10 days, but also requiring that if Argonaut draws on the letter of credit, the arbitration panel would require Argonaut to establish an escrow in the same amount, to be held by counsel for Certain Underwriters, but under control of the panel. Whalen Dec., Exh. R. Certain Underwriters' position in the arbitration would thereby be secured.

On January 3, 2003, Certain Underwriters again challenged the propriety of Interim Order No. 2, and requested that it be stayed. Whalen Dec., Exh. S. This request by the panel was denied the same day. Whalen Dec., Exh. T. On January 8, 2003, Certain Underwriters also lodged a formal response to Argonaut's December 24, 2002 motion for interim payment or letter of credit, and Argonaut replied on January 11, 2003. Whalen Dec., Exh. U-W.

On January 13, 2003 the Umpire again directed Certain Underwriters to comply with Interim Order No. 2. Whalen Dec., Exh. X. Certain Underwriters requested the opportunity for additional briefing regarding applicability of the California Insurance Code as well as the punitive nature of the Panel's order. Whalen Dec., Exh. Y. The next day the Umpire declared, "The Panel feels that further briefing is unnecessary as Petitioners had ample time to brief the issues, and would be duplicative. Accordingly, the Panel's ruling of January 13, 2003 and Interim Order No. 2 must be complied with without further delay." Whalen Dec., Exh. Z.

With Certain Underwriters still not having complied with Interim Order No. 2, on January 22, 2003, Argonaut moved for $10,000 per day in sanctions to commence as of January 17. Whalen Dec., Exh. AA. On January 27, 2003, Certain Underwriters moved for the panel to remove the Umpire, alleging that there were justifiable doubts about Mr. Gottheimer's impartiality. Whalen Dec., Exh. BB. On January 29, Certain Underwriters also opposed the motion for sanctions, arguing that the arbitration panel's authority derived from the Treaty, and that the sanctions would not draw their essence from the Treaty. Whalen Dec., Exh. DD. Argonaut replied regarding sanctions on January 30, 2003, arguing that the panel must be granted broad latitude in interpreting the contract, and that sanctions were permissible because the parties had not agreed to limit the remedies that would be available to the panel. Whalen Dec., Exh. EE.

On January 31, 2003, the panel stayed the motion for sanctions pending the parties' agreement to submit to an independent consultant chosen by the panel (Paul Dassenko) to examine the penalty to surplus question. Whalen Dec., Exh. FF. Certain Underwriters objected to the designation of Dassenko as the independent consultant because he was an Argonaut-appointed arbitrator in other reinsurance arbitrations pending with Certain Underwriters. Whalen Dec., Exh. GG. While not opposing Dassenko, Argonaut pointed out that Dassenko had recently be retained as the opposing arbitrator and had ruled contrary to Argonaut's interests in the Western MacArthur litigation. Whalen Dec., Exh. HH. The panel found that Dassenko also served as Certain Underwriters' appointed arbitrator in two matters. Whalen Dec., Exh. MM. The panel overruled the objection to the consultant and denied the petition to remove the Umpire. Id.

On February 7, 2003, the panel issued Interim Order No. 3, which imposed sanctions on Certain Underwriters of $10,000 a day, dating back to January 17, 2003, for each day in which Certain Underwriters are not in compliance with Interim Order No. 2. Whalen Dec., Exh. MM. The panel also ruled that "If the Petitioners comply with Interim Order No. 2 on a timely basis, the Panel will revisit the sanctions . . . and give consideration to the premium Petitioners paid for the bond." Id. The panel ordered the bond obtained by Certain Underwriters returned upon compliance with Interim Order No. 2. Id.

On March 3, 2003, Certain Underwriters filed an action in San Francisco Superior Court styled as a petition to disqualify the arbitration Umpire and to vacate Interim Orders No. 2 and No. 3. Argonaut removed this matter to the Northern District of California on March 18, 2003, claiming that the subject matter relates to an arbitration agreement covered by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 202.

B. Jurisdiction

The arbitration agreements between Certain Underwriters and Argonaut are commercial agreements between citizens of the United Kingdom and the United States, respectively. Argonaut removed this matter to the Northern District of California pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("Convention"). Both the United States and the United Kingdom are signatories to the Convention. 9 U.S.C.A. ยง 201 note, at 515 ...


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