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Recoverability of Attorney's Fees by a Reinsured in Defending Arbitration Award in Court

Costs of collecting reinsurance are a regular source of concern for reinsureds. Ideally, a reinsurer will pay a reinsurance claim on a timely basis after raising few, if any, inquiries about the claim. Or the reinsurer may raise questions or request documents to enable the reinsurer to understand the basis on which the underlying claim was settled or ceded to the reinsurance contract.

Oftentimes, however, a ceding company finds it necessary to initiate arbitration to collect its reinsurance. The general rule is that a reinsured must bear its own legal fees in arbitration. While arbitrators have the power in limited circumstances to award attorney’s fees, in most cases they do not do so. Thus, attorney’s fees and other costs of collection inevitably eat away at the principal amount of the reinsurance claim, reducing the reinsured’s net recovery.

If a reinsured prevails in an arbitration, in most instances the reinsurer will voluntarily pay the award. It is not uncommon, however, for a disappointed reinsurer to bring an action in court seeking to have the award vacated. If that happens, the reinsured faces the prospect of incurring still more legal fees before its reinsurance claim is paid.

In recent years, courts have begun to recognize that a litigant who continues to drag a dispute through the courts after losing in arbitration should face the prospect of sanctions in the form of attorney’s fees if its petition to vacate an arbitral award is without any real legal basis. See B.L. Harbert International, LLC v. Hercules Steel Company, 441 F.3d 905 (11^th Cir. 2006).

In an action in federal court, 28 U.S.C. § 1927 provides that an attorney may be personally liable for attorney’s fees and costs incurred by the prevailing party if the attorney has brought a legal proceeding “unreasonably and vexatiously.” This provision has been used by federal courts to award attorney’s fees to a party that successfully defended a favorable arbitration award in court. See DMA International, Inc. v. Qwest Communications International, Inc., 585 F.3d 1341 (10^th Cir. 2009). In DMA, the arbitrator adopted one party’s interpretation of a contract and rejected the other’s. The trial court upheld the arbitrator’s decision as did the appeals court. But the Tenth Circuit went further and awarded attorney’s fees to the prevailing party under 28 U.S.C. § 1927 on the grounds that, given the extreme deference courts accord arbitral awards, it was frivolous for the losing party to seek to overturn the arbitrator’s decision. Although DMA was decided by a federal appeals court, 28 U.S.C. § 1927 applies as well to actions in federal trial courts.

In awarding attorney’s fees, the court in DMA also relied upon Rule 38 of the Federal Rules of Appellate Procedure which provides that a court may award damages (including attorney’s fees) if it determines an appeal is frivolous. Federal trial courts may similarly award attorney’s fees under Federal Rule of Civil Procedure 11 against a party that has filed a pleading advancing a frivolous claim or argument.

Similar provisions exist in state courts. For example, Pennsylvania Rule of Appellate Procedure 2744 provides that an appellate court may award attorney’s fees if it determines an appeal is frivolous. In Gargano v. Terminix International Co., 2001 PA Super 282 (2001), the Pennsylvania Superior Court held that an appeal of an adverse arbitration decision was frivolous under Rule 2744 and remanded the case to the trial court for the imposition of attorney’s fees. In California, Code of Civil Procedure § 907 and California Rule of Court 8.276(a)(1) provide that an appeals court may award costs (including attorney’s fees) if an appeal is frivolous. In Evans v. Centerstone Development Company, 134 Cal. App. 4^th 151 (2005), the California Court of Appeal awarded attorney’s fees to the party that prevailed in an arbitration, stating that: “[w]e also publish this opinion to discourage parties to arbitration agreements from frivolously seeking judicial review of matters not cognizable in our courts.”

Courts have long held that judicial review of arbitration decisions is extremely limited. By agreeing to arbitrate their disputes, parties intend the award to be final and binding. Courts will not review the merits of an arbitrated controversy or the correctness of an arbitrator’s decision which generally will not be overturned even if based on an erroneous conclusion of fact or law. A party that loses an arbitration but then continues to litigate its claim in court defeats the key goals of arbitration which are to provide a less costly and quicker alternative to litigation. Courts are increasingly willing to penalize such a party for needlessly protracting litigation.

Reinsureds forced to defend arbitration awards in court should consider seeking attorney’s fees. In many cases, the losing party in arbitration makes the same arguments to a court that it made to the arbitrator. Although those arguments may have been perfectly reasonable in arbitration, once they have been rejected by the arbitrator, given the great deference courts give to arbitrators’ decisions, those same arguments may become unreasonable, even frivolous and sanctionable, if made to a court in support of an application to vacate an award.

For more information, please contact William E. Cox at 215.640.8519 or wcox@thorpreed.com.

This Thorp Reed & Armstrong, LLP article is prepared in summary form and is not to be construed as legal advice or opinion on any specific fact or circumstance. We do not assume any responsibility to revise the Communiqué if there are subsequent changes in the law.

#1082153; January 2010