chevron-down Created with Sketch Beta.

ARTICLE

A Second Arbitration for Claims Already Denied?

Sheila J Carpenter

Summary

  • Century Indemnity would allocate claims for sexual molestation to the policy year the misconduct was first alleged, simplifying claims handling but concentrating damages in specific years, potentially maximizing reinsurance coverage by reaching retention limits sooner.
  • An arbitration panel found Century Indemnity's method unreasonable, leading to a decision that the reinsurers were not liable to pay based on this aggregation method.
  • The case underscores the complexities of arbitration in insurance and reinsurance disputes, particularly around the finality of decisions and the handling of aggregated claims.
A Second Arbitration for Claims Already Denied?
miljko via Getty Images

In Certain Underwriters at Lloyd’s, London v. Century Indemnity Co., an arbitration panel upheld the reinsurers’ denial of certain claims. The ceding company later submitted the same claims using a different methodology and demanded arbitration when the reinsurers refused to pay. The reinsurers asserted claim preclusion. The U.S. District Court for the District of Massachusetts disagreed.

Certain Underwriters at Lloyd’s, London v. Century Indemnity Co., Nos. 18-cv-12041 and 19-cv-11056 (D. Mass. Mar. 6, 2020) (Casper, J.), was a reinsurance case involving the aggregation of claims for sexual molestation of minors taking place over decades within the Boy Scouts of America (BSA). Century Indemnity was the insurer for the BSA from the 1960s to the 1990s. Faced with the barrage of claims extending over many years, Century made an agreement with the BSA, apparently without consulting its reinsurers, to allocate each molestation claim to the policy in effect in the year the misconduct was first alleged to have occurred. In other words, if a BSA volunteer molested a child over a period of three years, the claim for the entire three years was considered to have occurred in the first year and all the damages were assigned to that claim year. This undoubtedly simplified claims handling, but it also had the effect of concentrating claim dollars in one year that, if the molestation were extended, would have been spread over several years. Concentrating claims into one year would allow Century Indemnity to reach its retention limit with its reinsurers sooner.

Compounding this effect, Century Indemnity aggregated all the BSA claims for each year into a single “occurrence” for reinsurance purposes. This method of billing also resulted in reinsurance attaching earlier and more deeply. In addition to the aggregation issues affecting retention, because the BSA claims ranged from the 1960s to the 1990s, claims outside the years covered by the reinsurers (1963–1970) were included in claims submitted to them. Not surprisingly, the reinsurers objected. Century Indemnity demanded arbitration and asked the panel to order the reinsurers to pay past claims and any future BSA-related billings.

The arbitration panel unanimously agreed that aggregating claims into the first year was unreasonable and held that the reinsurers were not liable to pay. Subsequently, the panel was asked to clarify the grounds for its award, and it supplemented its brief initial opinion by saying that its decision was based on the unreasonable methodology used to aggregate claims into the first year and not on the issue of whether all the BSA claims for one year could be aggregated into one claim. The panel advised that it had not found it necessary to reach that issue.

Following this decision, Century Indemnity discontinued the practice of assigning claims to the first molestation date but continued its practice of aggregating all the BSA claims for each year into one claim for billing its reinsurers. Again, the reinsurers objected to the methodology and did not pay. Century Indemnity demanded arbitration, but the reinsurers objected, arguing that the ceding company was trying to re-arbitrate a claim it had already lost.

The matter came to court when the reinsurers moved to confirm the initial arbitration award and Century Indemnity moved to compel arbitration of its refiled claims. The award was confirmed without opposition, but the demand for a second arbitration was contested on a number of grounds. The focus of this article is on whether the second arbitration was foreclosed by the first. The short answer is no; the ultimate answer will be decided by a second arbitration panel.

Claim Preclusion and Arbitration

It is well settled that an arbitration award should be considered res judicata in the same way as a judicial decision. However, it is also well settled that whether an arbitration award precludes a second arbitration is for the arbitrators in the second arbitration to decide. The fact that a court has confirmed the prior award simply protects that award from collateral attack. It does not make the award the decision of the court, given that the court’s review of an award is severely limited. Emp’s Ins. Co. of Wausau v. OneBeacon Am. Ins. Co., 744 F.3d 25, 28–29 (1st Cir. 2014). Employers Insurance provides a nice summary of the circuit court cases holding that the “effect of an arbitration award on future awards . . . is properly resolved through arbitration.” Id. at 27–28 (citations omitted).

The Century Indemnity court distinguished the cases cited by the reinsurers as involving improper collateral attacks on an arbitration award. Here the party demanding the second arbitration did not oppose confirmation of the award. Instead, the ceding company was asserting it was entitled to arbitrate the aggregation question the first panel did not decide. The court did not rule on whether there could be a second bite at the apple. It punted that question to a new arbitration panel. That in a sense gives Century Indemnity another bite at the apple. Whether the new panel will view the first award as claim preclusion or merely issue preclusion remains to be seen.

Implications for Arbitral Practice

Century Indemnity reminds us of some thorny issues when it comes to arbitration awards. It is certainly common for arbitrators (and courts) to stop their analysis when the decision on a particular issue means that one party prevails. Going on to a second issue not necessary for a decision can cause mischief. On the other hand, failure to do that can lead to repeated controversy and can cause unnecessary duplication and expense. Reasonable minds will differ, but Century Indemnity is an example of why it may be better to go ahead and draft an “even if” section of an arbitration award. This not only helps to avoid the second arbitration; it may provide an additional basis for confirmation.

It is also quite common for arbitration awards to end with “all other claims are denied.” In Century Indemnity, the panel said that it did not reach the issue of aggregation into one year, but it also said that all other claims were denied. Each party interpreted that language in its favor. One way to avoid this situation and a potential second arbitration would be to provide the arbitration panel with a list of issues the parties want decided. However, in a case involving the volume of claims faced by Century Indemnity and its reinsurers, counsel may believe the safer course may be to hope to win the day on some ground and then fight another day, if need be, about other grounds for decision. As with so many issues relating to how the award should look, discussion in advance with the clients, opposing counsel, and the panel can help avoid problems at the end.

    Author