April 1, 2010
Written By Attorneys: Michael J. Kurtis and Kenneth T. Levine
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
An Illinois appellate court has vacated an award of attorney's fees entered by an arbitration panel because the panel exceeded its powers and committed a gross error of law based upon the terms of the reinsurance agreement and the state's insurance code. Parties, practitioners and arbitrators must be guided by the state laws such as these that may impact the ability of an arbitration panel to issue awards that include such specific forms of damages.
The case, Amerisure Mutual Insurance Co. v. Global Reinsurance Corporation of America, Case No. 1-09-0820, began as a reinsurance dispute in which Amerisure demanded payment of outstanding balances from Global Re. In addition to seeking the outstanding principal balances and interest thereon, Amerisure sought to recover its attorney's fees and costs. In support, Amerisure relied, at least in part, on Section 155 of the Illinois Insurance Code, which punishes an insurer for vexatious and unreasonable actions or delays. The arbitration panel awarded Amerisure the principal amount sought and interest, as well as attorney fees in an amount not to exceed $1.5 million, based upon the panel's finding that Global Re violated its duty of utmost good faith to Amerisure.
Amerisure filed a motion to confirm the arbitration award in Illinois state court and Global Re filed an answer and counter application to vacate the award of attorney's fees. Global Re argued that the panel exceeded its authority by awarding attorneys fees that were not authorized by the parties' arbitration agreement; and because §155 of the Illinois code does not authorize the recovery of fees in a reinsurance arbitration. Global Re advanced a number of other positions that were not critical to the court's ultimate ruling.
The trial court denied Global Re's counter-application, finding that the panel did not exceed its authority and issuance of the award did not amount to a gross error of law and confirmed the arbitration award, including the award of attorney's fees.
On appeal, the First District Appellate Court of Illinois recognized that Illinois law permits the recovery of damages incurred as a result of unreasonable delays in the settlement of insurance claims on the basis that such damages will encourage insurers to act with the utmost good faith in resolving disputes. However, the court found that the panel exceeded its authority because it relied on Illinois law as the basis for awarding attorneys fees in a reinsurance arbitration. Section 155 does not authorize arbitrators to award such attorneys fees absent a provision in the arbitration agreement nor does the statute permit an award of attorneys fees by any tribunal other than a court of law.
The court stated that it did not "come to [its] decision lightly, without consideration of the deference given to arbitrators and the public policy behind arbitration." The court found, however, that the instant case was an extraordinary one where the arbitrators awarded attorneys fees based upon a statute that clearly reserved the authority to award such fees to the courts.
Amerisure contended that the arbitration panel's error amounted to merely a mistake of law and was not a sufficient ground to vacate the award of attorney's fees. However, the court disagreed, finding that the matter did not involve a mere dispute concerning the arbitrator's statutory interpretation, but an award that was clearly contrary to Illinois law. In so ruling, the court noted that Illinois generally applies the "American" rule regarding the recovery of attorney's fees only if authorized by the parties' agreement or statute. The parties in this case did not contract for the awarding of attorneys fees. In addition, the court noted that Illinois law does not recognize a "bad faith exception" to the "American" rule.
Notably, the court explicitly declined to address whether Section 155 actually applies to reinsurance relationships stating that even if §155 does apply to the reinsurance relationship, the arbitrators did not have the authority to award attorneys fees pursuant to the statute.
Practitioners should be guided by this appellate court ruling and its application to parties' reinsurance agreements and pending or future disputes in various jurisdictions such as Illinois with such case law and statutory arrangements.
