(Article from Insurance Law Alert, September 2021)
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The Seventh Circuit refused to set aside arbitration awards, finding that an honorable engagement clause provided the arbitration panel with wide discretion to interpret the underlying reinsurance agreement and impose remedies that extended beyond the “legal obligations” of the agreement. Continental Casualty Co. v. Certain Underwriters at Lloyds of London, 2021 WL 3720110 (7th Cir. Aug. 23, 2021).
In this reinsurance dispute between Continental and the Underwriters, an arbitration panel issued a Final Award in the Underwriters’ favor. At Continental’s request, the panel later issued a supplemental award (“Interim Order No. 3”) that clarified how its original award applied to certain future billings. Interim Order No. 3 specified that the Underwriters “have fully and finally discharged their past, present and future obligations” as to certain asbestos losses. Continental asked an Illinois federal court to set aside Interim Order No. 3, as well as a post-Final Award order denying its motion for consideration. Continental argued that the panel strayed beyond the scope of the reinsurance agreement in issuing those awards. In particular, Continental claimed that Interim Order No. 3 was a “sanction” because the Underwriters had not sought a ruling on future bills and that the panel lacked authority under the arbitration agreement to issue sanctions. The district court confirmed all arbitration awards and the Seventh Circuit affirmed.
The Seventh Circuit reasoned that the arbitration agreement gave the panel broad authority to “interpret the agreement as an honorable engagement and not merely a legal obligation.” More specifically, the court held that honorable engagement language gives the panel wide discretion to order remedies it deems appropriate, even those not expressly mentioned in the underlying agreement.
The court noted that while application of an honorable engagement clause presents a matter of first impression in the Seventh Circuit, the First and Second Circuits have similarly held that such clauses “leave the arbitrators pretty much at large in the formulation of remedies, just as in the formulation of contract interpretation.” (Citation omitted).