The opinion of the court was delivered by: William W. Caldwell United States District Judge
This action was initiated by M. Diane Koken, as the Liquidator of American Integrity Insurance Company to recover on a reinsurance agreement American Integrity had with defendant, Cologne Reinsurance (Barbados), Ltd.*fn1 The action was filed in the Pennsylvania Commonwealth Court, but removed here by Defendant. After removal, we required the parties to arbitrate the dispute, as the reinsurance agreement provided. Koken v. Cologne Reinsurance (Barbados), Ltd., 34 F. Supp. 2d 240 (M.D. Pa. 1999).
The action is before us now for a second time, on a motion by Defendant to confirm the May 2009 final arbitral award and a motion by Plaintiff to vacate the award in part.*fn2 In its motion, Defendant argues that the award should be confirmed based on the narrow standard of review for arbitral awards. In his motion, Plaintiff argues that the award should be vacated based on evident partiality by the arbitrators, or in the alternative, vacated in part because the arbitrators manifestly disregarded the law.*fn3
In 1990, Cologne and American Integrity entered into a Coinsurance Agreement by which Cologne agreed to reinsure American Integrity for twenty percent of losses on certain nursing care, home-health care and medicare-supplement policies. The Agreement also required Cologne to post a letter of credit as security "for [its] Unearned Premium Reserves plus the sum of the Reinsurer's share of the Claims Reserves and the Active Life Reserves." (Doc. 119, Costigan Decl., Ex. A, CM/ECF p. 11).
In June 1992, American Integrity and Cologne executed "Amendment 3" to the Agreement, allowing American Integrity to withhold reinsurance payments due to Cologne under the Coinsurance Agreement as security for Cologne's share of the reserves necessary to cover any losses. In return, Cologne could require American Integrity to establish a trust account (the "Trust Account") in which the withheld funds would be placed. (Id., Ex. A, CM/ECF p. 21). The provision dealing with the letter of credit was amended so that the letter of credit could be in an amount "less the amount of any funds held by" American Integrity. (Id., Ex. A, CM/ECF p. 25).
In December 1992, the parties executed "Amendment 5" to the Coinsurance Agreement. According to the Liquidator, Amendment 5 "broadened" the reinsurance "to a 95% quota share reinsurance of the otherwise unreinsured portions of American Integrity's Hospital Indemnity, Home Health Care, Hospital Surgical, Medical Surgical and Long Term Care (standard) coverages on specified policy forms." (Doc. 120, the Liquidator's Opp'n Br. at p. 11, citing doc. 119, Ex. A). The Trust Account provision was changed to now require American Integrity to place funds in the account and to define the original trust account balance as Cologne's share of the reserves, minus $6.5 million. Additionally, a setoff provision in the Coinsurance Agreement was modified to allow the setoff of any debts between the parties, not just debts on the Coinsurance Agreement, as originally drafted.
At the same time as Amendment 5 was executed, the parties entered into the Stop Loss Agreement by which American Integrity would reinsure Cologne for some of the reinsurance Cologne provided American Integrity under the Coinsurance Agreement. (Doc. 119, Ex. C, CM/ECF p. 66).
Upon petition to the Pennsylvania Commonwealth Court, American Integrity was ordered into liquidation on June 25, 1993. This litigation was started to determine what Cologne owes American Integrity's estate under the Coinsurance Agreement. At the first arbitration, the Liquidator argued that Cologne could not offset what it owed under the Coinsurance Agreement against American Integrity's obligation to reinsure Cologne under the Stop Loss Agreement because of 40 Pa. Stat. Ann. § 221.21 (West 1999). As applicable here, that statutory section provides that all insurance provided by a liquidated insurance company "shall continue in force" only "for a period of thirty days from the date of entry of the liquidation order."*fn4 The liquidator also argued that the combined effect of the Coinsurance Agreement and subsequent agreements the parties entered into, Amendment 5 and the Stop Loss Agreement, made Cologne's obligation under the Coinsurance Agreement "in the nature of a capital contribution" by virtue of being an increase in American Integrity's surplus. Hence under 40 Pa. Stat. Ann. § 221.32(b)(3)(West 1999), American Integrity's obligation under the Stop Loss Agreement could not be used to offset Cologne's obligation under the Coinsurance Agreement.*fn5
The arbitrators rejected both arguments. In their final award dated March 17, 2006, they ruled in part that: (1) the statutory exceptions to setoff did not apply so the Liquidator's claim under the Coinsurance Agreement could be offset by Cologne's claim under the Stop Loss Agreement; and (2) "The Stop Loss Agreement did not terminate as of July 25, 1993 pursuant to 40 P.S. 221.21." Koken, supra, 2006 WL 2460902, at *2 (quoting the final award).*fn6
As noted, Cologne moved in this court to confirm the award, and the Liquidator moved to vacate it in part. On August 23, 2006, we vacated the portion of the award ruling that the Stop Loss Agreement "did not terminate as of July 25, 1993." We decided instead (even under a manifest-error-of-law standard) that section 221.21 did apply so that the Stop Loss Agreement continued in force only until July 25, 1993, thirty days after the date of the liquidation order. Koken, supra, 2006 WL 2460902, at *8. Upon further motion, we required the parties to arbitrate the issues raised by our decision before a different arbitration panel. See Koken v. Cologne Reinsurance (Barbados), Ltd., 2006 U.S. Dist. LEXIS 87888 (M.D. Pa. Dec. 5, 2006).
The Liquidator raised the following issues before the second arbitration panel. First, Cologne was obligated under the Coinsurance Agreement to pay the difference between its liability under that agreement and the amount on hand in the Trust Account. In the Liquidator's view, Cologne had an "obligation to secure any deficiency in the Trust Account relative to the reserves applicable to the reinsured business." (Doc. 119, Liquidator's post-hearing brief, CM/ECF pp. 82-83). This obligation arose from Amendment 3, which altered Cologne's obligation to fund the letter of credit by requiring it to take into account the amount of any funds American Integrity had placed in the Trust Account by subtracting that amount from the amount required to fund the letter of credit. In this argument, the Liquidator also pointed to Amendment 5, which specifically defined the amount in the Trust Account as Cologne's share of the reserves, minus $6.5 million, that is, defining the amount by taking $6.5 million off the top and thus, as argued, leaving Cologne with the responsibility of making up the difference in the letter of credit.*fn7
Second, the Liquidator argued that Cologne owed American Integrity for Cologne's reinsurance share of the American Integrity policies that the National Organization of Life and Health Guaranty Associations (NOLHGA) transferred to two other insurance companies, UNUM Life Insurance Company of America and MEGA Life and Health Insurance Company.*fn8 The Liquidator based this argument in part on the Insolvency Clause of the Coinsurance Agreement (doc. 119, Costigan Decl., Ex. A, CM/ECF p. 35), which keeps the reinsurance in force, and payable to American Integrity or the Liquidator, even if American Integrity becomes insolvent. The Liquidator calculated Cologne's share of this "assumption funding" as: (1) the claimed $4.7 million deficiency in the reserves based on Amendment 5's definition of the amount that should be in the Trust Account; and (2) $4.2 million, representing Cologne's share of additional Active Life Reserves that had been transferred to UNUM. The Liquidator contended that the transfer of American Integrity's policy obligations to solvent insurers was reasonably foreseeable, that the amounts paid the assuming insurers was necessarily based on actuarial estimates, that the assumption payments were actually made to the assuming insurers and that Cologne consented to the assumption agreements.
On August 14, 2008, the second panel issued its first Interim Award. (Doc. 112, CM/ECF p. 100). First, the panel rejected the Liquidator's argument that Cologne was obligated under the Coinsurance Agreement to pay the difference between its liability under that agreement and the amount on hand in the Trust Account by virtue of Cologne's obligation to make up deficiencies in the Trust Account by contributions to the letter of credit. The panel viewed this as an argument that Cologne had an obligation to fund the Trust Account and stated "that there was no intent that Cologne [ ] has the responsibility to fund the Trust Account." (Id., CM/ECF p. 100). The panel thus ruled that Cologne could use the Trust Account to offset any liability it had under the Coinsurance Agreement.
The panel then turned to the effect of our ruling that the Stop Loss Agreement continued in force only until July 25, 1993. It construed this to mean that the Stop Loss Agreement terminated on July 25, 1993, and then proceeded to determine the effect of that termination on American Integrity's obligations to Cologne under the Stop Loss Agreement. The Stop Loss Agreement had no clause dealing with termination, but it did provide that reinsurance under the agreement was subject to the terms and conditions of the Coinsurance Agreement, so the panel looked to the termination clause in the latter agreement. That clause provided that: "In the event of termination, the Reinsurer will remain liable for any loss or losses incurred from policies issued and in force prior to termination." (Doc. 112-2, CM/ECF p. 1). The panel thus "rule[d] that following termination of the Stop Loss Agreement pursuant to 40 P.S. § 221.21, American Integrity retained liability to Cologne [ ] for the Reinsured Policies that were in force as of July 25, 1993, and for losses incurred as of July 25, 1993." (Id., CM/ECF p. 1). The liability would terminate on the effective dates of the assumption agreements, which was October 1, 1993, for UNUM, and June 1, 1994, for MEGA. The panel further ruled that American Integrity's liabilities under the Stop Loss Agreement could be offset by Cologne's liabilities under the Coinsurance Agreement,(id.), that Cologne's liability under the Coinsurance Agreement could not be established by estimates, and that its liability under the Coinsurance Agreement did not extend to any claims or losses paid under the Reinsured Policies after the effective dates of the UNUM and MEGA assumption agreements.
The panel deferred ruling on two issues: (1) whether the Stop Loss Agreement applied to policies in force after the termination date of July 25, 1993, and for losses incurred thereafter; and (2) "whether payments made by the Guaranty Funds to UNUM and MEGA to induce those companies to assume the Reinsured Policies may be ceded to Cologne [ ] as losses under the Coinsurance Agreement." (Id.).
On August 25, 2008, the panel issued Interim Award #2, which addressed the first deferred issue, ruling as follows:
Using the same rationale as expressed in the initial Interim Award, we hereby rule that losses incurred on policies still in force after the termination date of July 25, 1993 for which claims were noticed and losses paid prior to the Effective Dates of the Assumption Agreements are losses to which both the Coinsurance Agreement and Stop Loss agreement respond and are ...