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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

HCC AVIATION INSURANCE GROUP, §

INC. and UNIVERSAL LOSS §

MANAGEMENT, INC., §

 §

Petitioners, §

 § Civil Action No. 3:05-CV-744-M

vs. §

 § 

EMPLOYERS REINSURANCE §

CORPORATION, §

 §

Respondent. §

MEMORANDUM OPINION AND ORDER

Before the Court are Petitioners’ Petition to Confirm the Arbitration Award and

Respondent’s Motion to Vacate the Arbitration Award. For the following reasons, the Court is

of the opinion that Petitioners’ Petition should be DENIED, and Respondent’s Motion should be

GRANTED.

Background

This action is the third in a series of lawsuits arising from an aircraft accident that

occurred in 1996. In the initial suit, the aircraft’s student-pilot sued his instructor, in West

Virginia state court, for personal injuries he suffered during the crash. The instructor sought

indemnification from his insurer, Ranger Insurance Company (“Ranger”). Ranger refused to

defend and indemnify the instructor. The student-pilot and instructor settled the personal injury

claims, and they jointly asserted bad faith claims against Ranger. Subsequently, Ranger entered

into a settlement with the parties. 

 

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The parties to the Reinsurance Agreement were ERC and Signal Aviation, the predecessor to HCC.

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In September of 2001, Ranger and its reinsurer, Respondent Employers Reinsurance

Corporation (“ERC”), filed a second lawsuit in West Virginia state court against its defense

attorneys in the first suit, and against Petitioners HCC Aviation Insurance Group, Inc. (“HCC”)

and Universal Loss Management, Inc. (“ULM”). Petitioners are “claims handling facilities,” the

entities responsible for managing the Ranger insurance claims at issue in the personal injury suit.

In the second action, ERC and Ranger alleged Petitioners breached a Management Agreement,

and committed negligent claims handling by breaching their “implied duty of utmost good faith”.

ERC argued it was equitably subrogated to Ranger’s claims because it funded Ranger’s

settlement of the first action.

HCC and ULM filed a Motion to Dismiss the second action, pursuant to Rule 12 of the

West Virginia Rules of Civil Procedure. Petitioners alleged, among other things, that Article 13

of the Reinsurance Agreement between ERC and HCC1

 precluded ERC from suing them. In

Article 13, ERC agreed to indemnify HCC for any “extra-contractual obligations” that it incurred

in connection with its “failure to pay or delaying in payment any benefits under any policy.”

Petitioners argued the contract required ERC to indemnify HCC for its allegedly negligent

handling of the student-pilot’s insurance claim. Although ULM was not a signatory to the

Reinsurance Agreement, Petitioners argued ULM was also entitled to indemnification under

Article 13, because ULM was acting at all times as HCC’s agent. 

On July 29, 2002, the West Virginia court issued an Order addressing Petitioners’ Motion

to Dismiss. The court declined to dismiss ERC’s claims against Petitioners for negligent claims

handling, and it declined to dismiss the breach of contract claim against HCC. The court stated

that it could “not accept the proposition that ULM is a party under the [Reinsurance] Agreement

 

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just because it is an agent of HCC.” Although HCC was potentially indemnified under Article

13 for its own actions, the court found HCC would “be responsible for acts that ULM committed

while acting within the scope of its authority for HCC.”

On December 2, 2002, the West Virginia court issued a second Order, in which it held

that ERC’s remaining claims were subject to the parties’ arbitration agreement. The court

ordered that all “legal and equitable claims remaining between the parties as ordered, adjudged,

and decreed by this Court’s Order dated July 29, 2002, shall be stayed and submitted to one

arbitration panel for binding arbitration.” Before the commencement of arbitration proceedings

in Dallas, Texas, counsel for ERC and Petitioners exchanged correspondence regarding the

scope of the arbitration proceedings. Their arbitration agreement, at Article 22A, requires that

the Notice requesting arbitration be in writing and “state in particular all issues to be resolved in

the view of the claimant.” By their correspondence, they specifically identified ERC’s

remaining claims against Petitioners as “whether HCC/ULM was negligent in their claims

handling of the [accident], whether the Management Agreement was breached, and whether

HCC/ULM breached its duty of utmost good faith to ERC, the reinsurer.”

On April 8, 2005, the arbitration panel issued a Final Award in favor of Petitioners. The

panel determined that the parties to the Reinsurance Agreement, ERC and HCC, had intended for

the coverage provided under Article 13 of the Reinsurance Agreement to apply to both HCC and

ULM. Accordingly, the arbitrators found ERC was precluded from recovering against either of

the Petitioners. Petitioners now seek confirmation of the arbitration award, and Respondent

seeks to have the arbitration award vacated.

Analysis

 

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The Court exercises “extraordinarily narrow” review of arbitration awards. Prestige

Ford v. Ford Dealer Computer Services, Inc., 324 F.3d 391, 393 (5th Cir. 2003) (citing Gateway

Technologies, Inc. v. MCI Telecommunications Corp., 64 F.3d 993, 996 (5th Cir. 1995)). The

proper grounds for vacatur of an arbitration award are found principally in the text of the Federal

Arbitration Act (“FAA”). Relevant to this dispute is 9 U.S.C. § 10(a)(4), which allows the Court

to vacate the arbitration award “where the arbitrators exceeded their powers, or so imperfectly

executed them that a mutual, final, and definite award upon the subject matter submitted was not

made.” Alternatively, the Court may vacate an arbitration award on non-statutory grounds,

where the arbitrators exercised “manifest disregard of the law.” Prestige Ford, 324 F.3d at 395. 

Having reviewed the evidence and argument presented by the parties, the Court is of the

opinion the arbitration panel exceeded its powers when it concluded ULM was entitled to

indemnification under Article 13 of the Reinsurance Agreement between HCC and ERC. In

their Motion to Dismiss, Petitioners expressly requested the West Virginia court to rule that: (1)

ERC was contractually obligated to indemnify ULM for ULM’s allegedly negligent conduct; and

(2) therefore, ERC’s claims against ULM, and its claims against HCC seeking to hold HCC

liable for the conduct of ULM, should be dismissed. The West Virginia court rejected

Petitioners’ argument, and held that “HCC will be responsible for acts that ULM committed

while acting within the scope of its authority for HCC.” On its face, this conclusion is a finding

of law, which, under the “law of the case” doctrine, is “binding precedent to be followed in

successive stages of the same litigation.” F.D.I.C. v. McFarland, 243 F.3d 876, 884-85 (5th Cir.

2001). 

By necessary implication, the July 29, 2002 Order holds that coverage under Article 13 is

unavailable to ULM. Had the trial court determined that a question of fact existed as to the

 

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Petitioners argue the Reinsurance Agreement was not “outside” the parties’ pleadings because it was

affixed to ERC’s Complaint, and was central to ERC’s claims. However, Petitioners do not cite the Court to any

West Virginia authorities supporting their argument that such documents are deemed to be within the parties’

pleadings. The Court has been unable to locate any such authorities. 

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scope of Article 13's protections, it would have been unable to find HCC responsible for the acts

of its agent. In light of the trial court’s implicit conclusion, the indemnification argument should

not have been revisited by the arbitration panel. Id. (the “law of the case” doctrine restricts the

scope of subsequent proceedings, “regardless of whether the issue was decided expressly or by

necessary implication.”). 

Petitioners disagree, arguing the West Virginia court’s Order was not binding on the

arbitration panel, because the Order addressed a Motion to Dismiss, and was necessarily limited

to the narrow question of whether ERC had stated a claim for relief against Petitioners.

Petitioners assert that the law of the case doctrine is inapplicable in such circumstances. See

Lockheed Martin Corp. v. Network Solutions, Inc., 141 F. Supp.2d 648, 654 (N.D. Tex. 2001)

(the law of the case doctrine was not applicable when “all the court decided by its order denying

the motion to dismiss was that plaintiff should be allowed to proceed with its claims.”).

However, the trial court’s analysis of the Motion undoubtedly included a consideration of

whether Article 13 was available to ULM, and the court could not have addressed that issue

without reviewing the terms of the parties’ Reinsurance Agreement. When a West Virginia

court’s adjudication of a motion to dismiss involves the reviewing of evidence outside the

parties’ pleadings, the motion to dismiss is automatically converted into a motion for summary

judgment. See Shaffer v. Charleston Area Medical Center, Inc., 485 S.E.2d 12, 17 (W. Va.

1997).2

 Therefore, once the West Virginia court considered the parties’ Reinsurance Agreement,

 

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its findings became binding precedent for subsequent stages of this case, irrespective of the label

affixed to Petitioners’ motion. See id.

Moreover, the Court finds the arbitration panel exceeded its authority by considering an

issue that was beyond the scope of the parties’ submission agreement. See Executone

Information Systems, Inc. v. Davis, 26 F.3d 1314, 1323 (5th Cir. 1994) (an arbitration panel’s

jurisdiction is confined by the language of the arbitration provision of the parties’ contract, and

by any submission agreement the parties may have had). After the West Virginia court referred

ERC’s claims to arbitration, the parties agreed to arbitrate the “claims remaining between the

parties,” as “set forth” by the West Virginia court in its July 29, 2002 Order. The parties agreed

that those claims included “whether HCC/ULM was negligent in their claims handling of the

[accident], whether the Management Agreement was breached, and whether HCC/ULM

breached its duty of utmost good faith to ERC, the reinsurer.” The Court finds this

correspondence constituted a submission agreement, which limited the scope of the arbitrators’

jurisdiction to the merits of ERC’s negligence and breach of contract claims against Petitioners.

See id. Since the West Virginia court’s July 29 Order had already resolved ULM’s

indemnification argument under Article 13, and since the parties agreed that the issues resolved

in the July 29 Order would not be revisited in arbitration, the Court finds the arbitration panel

erred by reaching the indemnification argument. See id. 

Conclusion

For these reasons, the Court finds the Arbitration Award, dated April 8, 2005, should be

VACATED, and Petitioners’ Petition to Confirm the Arbitration Award should be DENIED.

The case is remanded to the arbitration panel to consider those issues properly before it pursuant

to the Court’s July 29, 2002 and the parties’ correspondence. 

 

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SO ORDERED.

DATED: September 13, 2005.

___________________________

Barbara M. G. Lynn

UNITED STATES DISTRICT JUDGE

 

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