U.K. Arbitrators Construe Hand-Written Settlement Agreement


Intermittently over the past four years, an arbitration panel in London has been the forum for a complex insurance coverage dispute arising out of a disastrous explosion at a manufacturing plant in Louisiana. The plant was owned by a Louisiana corporation, but was operated and managed by a Texas corporation.

The Texas corporation, as the plant's operator, was named as a defendant in several law suits following the explosion. These suits included one commenced by the plant's owner for the near total destruction of the plant itself. Naturally, the Texas corporation turned to its various insurers for defense and indemnity. One of those insurers was a Bermuda company that had issued a high level excess insurance policy. That policy contained an arbitration provision that designated London as the forum but New York law as the governing legal authority. Thus, as strange as it may seem, the arbitration in London was governed by New York law and involved a dispute between a Texas insured and its Bermuda insurer that arose out of an explosion in Louisiana. [How this state of affairs came to be can only be the subject of speculation. Perhaps the Bermuda insurer felt more comfortable procedurally with the U.K. Arbitration Act, but recognized that the policy would be difficult to market in the U.S. if U.K. substantive law were to apply as well. Presumably New York was selected because it is considered a "conservative" jurisdiction, i.e., less reflexively hostile to insurers.]

Because the London arbitration was necessarily being handled by British solicitors and barristers, each side also retained New York counsel to present the substantive legal positions. MCW was retained as the "expert" on New York insurance law by the solicitors representing the Texas insured.

The Beginnings

Following the explosion, but before commencement of the arbitration, attorneys for both parties met in Texas in an effort to settle coverage disputes that were developing. At the time of that meeting, a lawsuit was pending against the insured that had been commenced by the owner of the facility for property damage to the facility. Although there was some indication that there might be personal injury claims and off-site property damage claims, they were considered to be of little consequence at that time. This assumption, however, proved to be erroneous. Two multi-million dollar personal injury class-action lawsuits were subsequently brought and numerous off-site property damage claims were filed. These actions dramatically increased the potential liability faced by the insured and threatened to drive it into bankruptcy if sufficient insurance funds were not available.

For various reasons, both sides were anxious to reach some resolution. When an outright settlement seemed doubtful, a "high/low" agreement was drafted and proposed by counsel for the Bermuda insurer. That agreement took the form of a hastily hand-written "Offer of Settlement" that was subsequently signed by representatives of both parties.

This hurriedly scrawled agreement was spurred by the need for both parties to work quickly to minimize their potential losses. The insured was facing an impending trial of the property damage lawsuit, and the insurer was in the course of preparing a stock offering that would be adversely affected by a potentially substantial indemnity obligation of an unknown sum.

The policy in question covered the layer of $100 million in excess of $102 million. The high-low feature of the hand-written agreement stipulated that the insurer would make a non-refundable $15 million payment to the insured, the coverage disputes would be submitted to arbitration as set forth in the policy, the insurer would have a credit of $15 million against any amount awarded to the insured in arbitration, and the insurer would "in no event be required to pay more than $80,000,000" to the insured. The agreement also provided that the insured would release the insurer "from any and all liability, which release shall be in form and substance acceptable" to the insurer.

The Dispute

Although the arbitration was initially instituted to resolve the insurance coverage issues, interpretation of the hand-written high/low agreement actually consumed most of the parties' and the panel's efforts. Although it had signed the hand-written agreement and made the $15 million payment called for by it, the insurer sought to have the agreement declared unenforceable because certain alleged conditions precedent were not satisfied. After several hearings, the panel ruled that under New York law the written agreement was binding and enforceable despite the absence of fully detailed terms and the reference to the execution of "definitive written agreements."

Once that issue was laid to rest, the panel was asked to consider two issues that would effectively determine the insurer's defense and indemnity obligations, namely: the extent of the release given to the insurer; and whether the $80 million high/low limit was exclusive of costs and interest. These were issues that required the panel to construe the hand-written agreement in accordance with New York rules of contract interpretation.

Scope of Release

The insurer argued that the extent and effect of the "release" contained in the high/low agreement was to absolve it from all liability of any kind arising out of the explosion, not just the facility owner's property damage claims. In essence, the insurer argued that it had been released from any liability for the personal injury class-action lawsuits and off-site property damage claims. The insured sought a declaration from the tribunal that it was entitled to be indemnified for the personal injury and property damage claims irrespective of the nature of the claims, and the release was with respect to the insurer's liabilities under the policy in excess of the "high" of $80 million.

The panel first determined that New York law governed the construction of the language of the high/low agreement. Both parties made extensive written and oral submissions on New York law. New York principles of contract construction dictated that the panel, in an effort to ascertain the mutual intent of the parties, consider discussions and negotiations that took place before the agreement was executed as well as the subsequent conduct of the parties, including draft "definitive written agreements" that were never finalized.

Although the Texas attorney who negotiated the agreement for the insured testified that he believed at the time that the entire $80 million would be consumed by the owner's property damage claim, he also testified that he never agreed to release all other claims. Logically, the insured would not release such other potential claims against it because the insurer's grounds to decline those other claims were much more tenuous (if not nonexistent) than the ones pertaining to coverage for damage to the facility. The insured would not release claims whose coverage was not questionable in exchange for an agreement to arbitrate the questionable claim.

Witnesses for the insurer testified to their recollection that the high/low agreement was designed to bring certainty and finality to any disputes regarding their coverage, and that the insurer was to have no further liability in respect of any claims, subject only to arbitration of the coverage issues relating to the owner's property damage claims. The panel ultimately concluded that the high/low agreement did not limit the insurer's potential liability under the policy to the property damage claims of the facility owner that were being arbitrated. The release merely limited the insurer's liability to the extent that any and all claims arising out of the explosion exceeded $80 million.

The panel was motivated in part by the age-old doctrine of contra proferentem. This cornerstone of contract construction dictates, of course, that any ambiguity in a written agreement is to be construed against the drafter. Because the panel found the "release" provision as drafted by the insurer's attorneys to be ambiguous and subject to competing reasonable interpretations, it was construed in favor of the insured.

INTEREST AND COSTS

The panel was next asked to consider whether the $80 million limit was exclusive of interest and costs. The insured contended that the tribunal could award interest and costs as it saw fit above and beyond the $80 million cap. The insurer, naturally, contended that the $80 million was the absolute maximum whether that sum was comprised of damages, interest, costs, or otherwise. Relying on sections 18 and 19 of the English Arbitration Act of 1950, the panel ruled that it had the statutory power to award interest and costs exclusive of any policy limit or other agreement, and that absent clear wording in the high/low agreement that limited the panel's power, its statutory power was unaffected. The panel accordingly ruled that any interest and costs awarded by it would not be taken as going toward the $80 million limit.